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Nonlinear dynamics of Kimchi premium

Author

Listed:
  • Seo, Myung Hwan
  • Koo, Bonsoo
  • Yang, Yangzhuoran Fin

Abstract

Kimchi premium, the persistent non-zero price difference exists between the US and Korean crypto-markets. Not only does the premium represent a violation of the law of one price but it may also reflect the bubble aspect of crypto-markets or crypto-market segmentation. Contrary to the literature relying on linear modelling, we employ threshold regression with multiple regimes to show the nonlinear dynamics of the premium and identify its determinants. We find that the premium is mean-reverting when it exceeds a certain level of thresholds but displays a random walk inside the range, which implies that only for relatively large-sized premiums, arbitrageurs exploit the premium. Kimchi premium has a non-zero long run steady-state level of 1.24% for Bitcoin aligned with the violation of the law of one price. We demonstrate that the non-zero premium exists due in part to market frictions given that the trading fee is positively correlated with the threshold.

Suggested Citation

  • Seo, Myung Hwan & Koo, Bonsoo & Yang, Yangzhuoran Fin, 2024. "Nonlinear dynamics of Kimchi premium," Economic Modelling, Elsevier, vol. 135(C).
    • Handle: RePEc:eee:ecmode:v:135:y:2024:i:c:s0264999324000828
    DOI: 10.1016/j.econmod.2024.106726
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    More about this item

    Keywords

    Kimchi premium; Threshold regression; Cryptocurrency; Nonlinearity; Market frictions;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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