A rapid increase in short-term foreign debts due to sustained arbitrage
opportunities is an important cause to induce the instability of foreign and
financial markets in Korea in the face of the 2008 global financial crisis. As for
sustained arbitrage incentives, the focus of this paper is on repeated external
shocks to won/dollar spot exchange rates in the situation where it is difficult
to compete away profits from arbitrage due to various frictions in the
transactions for arbitrage. According to the empirical investigation based on
both daily time series data from January 2003 to August 2008 and monthly time
series data from January 2000 to August 2008, it turns out that the sale of
domestic stocks by foreign investors which had been sustained since the 2nd
quarter of 2006 is a significant factor to explain the increase in won/dollar
exchange rate and consequent arbitrage opportunity, and that the arbitrage
opportunity resulting from the sales of domestic stocks by foreign investors is
a significant factor to explain the rapid increase in short-term borrowing from abroad.