Three Essays on Financial Service Regulation in China and Korea

Abstract

Financial regulation is a form of control or supervision that supervises the financial institution, financial market and business, which aims further to reduce the risk of information asymmetry, adverse selection, and moral risk. The establishment of an effective financial supervision system is a necessary prerequisite for maintaining the financial security of a country. In the global scope, so far, no financial regulation is appropriate for all the countries. The establishment of the financial regulation should depend on the economic environment and financial operation of a country. Therefore, in principle, the financial regulation can be viewed as reasonable and useful financial service regulation if it can prevent the systemic financial risk and improve the effectiveness of financial supervision. This study includes three essays that mainly focus on the financial service regulation in China and Korea. The first essay focuses on the effect of daily price limit relaxation on the volatility of stock returns in Korea. On June 15, 2015, the daily price limit of stock was relaxed from 15% to 30% by the Korea Exchange. As a result, it will result in the increase of volatility of stock return, which is the main issue we are concerned about. In this paper, the model established by Jin Yoo (2001) has been employed to estimate the true volatility of stocks that hit the daily price limit before and after the price limit relaxation. Also, this paper has conducted a test on the significance of the difference between the true volatility before and after the price limit relaxation through the F test. Meanwhile, in the paper, event study has been adopted to examine whether the volatility of stock return increases after the price limit restriction. The sample is the daily return of top 300 stocks of market capitalization in KOSDAQ and KOSPI of five months before and after price limit relaxation. The empirical results show that after the price limit relaxation, the observed volatility is closer to the true volatility of stock return under 30% price limit. The stock return with high volatility is more easily affected by the price limit relaxation. At the same time, the results of the event show that volatility of stock returns increases after the relaxation of the price limit up to 30%. The second essay mainly studies the impact of contractionary monetary policy shocks on China’s shadow banking. In this paper, China's shadow banking is divided into two parts, namely the core shadow banking, and non-core shadow banking. Core Shadow banking includes entrusted loans, trust loans, and non-discount bank acceptance bank bills, while non-core shadow banking consists of wealth management products, securities companies, financial companies, private lending, financial leasing, small loans, pawn loans and P2P lending. In recent years, the shadow banking has achieved fast growth in China, and by the end of 2015, the size of the shadow banking had exceeded over 50 trillion yuan, accounting for 79% GDP of the total in China. However, the shadow banking business is off balance sheet that outside any financial regulation, due to which it may not be controlled with the occurrence of the risk. Therefore, it is the primary objective of this essay to examine whether the contractionary monetary policy shock has a significant impact on the shadow banking. The sample in this article includes the quarterly growth rate of GDP, CPI, commercial bank assets and the shadow banking assets, as well as the interest rate from June 2003 to June 2016. The essay imposes a negative restriction on the growth rate of GDP and CPI, and sets interest rates as the contractionary monetary shock, after which sign restrictions VAR model is used to estimate the impact of contractionary monetary policy on China’s shadow banking. The results show that contractionary monetary policy can significantly decrease the rapid growth of commercial bank assets, but the impact just maintains about three months. However, the contractionary monetary policy has no significant effect on the shadow banking. These findings highlight potential challenges to using monetary policy to control financial sector activity and achieve financial stability goals in China. The third essay empirically studies the regional difference of Peer to Peer lending in China. It suggests four hypotheses aiming to explore the causes that result in the differences of P2P lending volume in different regions. To do the empirical study, this article choose P2P markets of eight typical provinces as the sample, and divides it into two groups, the high P2P lending volume consists of four eastern provinces, and three of them are coastal regions, and the low P2P lending volume including one Middle province, one western province, and two eastern province. This essay selects panel data with the variables of real estate sales, restrictive policy, the number of investors and borrowers as well as P2P platform, and P2P interest rate from January 2014 to August 2016. Then it chooses the suitable model from Fixed and Random Effects by Hausman test. The results reveal that the growth of real estate sales, the growth of borrowers and investors, and P2P interest rate caused the regional differences of P2P lending in China. In the high lending volume group, the growth of real estate sale, investors and borrowers have positive impacts on the growth of P2P lending volume, as well as the P2P interest rate, has negative impacts. While in the group of low P2P lending volume, besides of the growth of investors and borrowers, the independent variables cannot explain the high growth of P2P lending volume at all.