Are They Hedgers or Speculators? Evidence from South Korea's Political Elections.

This study uses a simultaneous equation model based on a three-stage least squares estimation to offer new empirical evidence that investors are hedgers or speculators during South Korea's elections. Major investor groups include individuals, securities companies, and foreigners in the Korea Composite Stock Price Index (KOSPI 200) market. The results show that cash market volatility and futures market activity have lead behaviors with one another. However, the contemporaneous variables of cash market volatility and options market activity have only unidirectional causality. Most investors will trade futures and options contracts for speculating within the entire sample period. During political election periods, investors prefer to trade options contracts for hedging rather than futures contracts. [ABSTRACT FROM AUTHOR]