Empirical Study of Volume and Voltility Effects Associated with ELS and ELW Issuance

ELS and ELW markets have been increasing sharply and become one of important financial markets in Korea since their inception. The purpose of this paper is to examine the impacts of issuance and maturity of ELS and ELW on both volume and volatility of underlying stocks in Korea. In this paper we follow Faff and Hiller (2005) and Antoniou and Holmes (1995) to examine the hedging effect hypothesis. The empirical results indicate that there is a significant effect of ELS issuance on the volume and volatility of underlying stocks, which is consistent with the hedging effect hypothesis. However, the empirical results of ELW issuance and maturity on those of underlying stocks do not support the hedging effect hypothesis but do support the complete market hypothesis.