Economic policy uncertainty and the <scp>Kimchi</scp> premium in the cryptocurrency market

Abstract We construct a new daily measure of uncertainty about economic policy for Korea. The economic policy uncertainty (EPU) index is extracted from the reporting about economic policy in major Korean newspapers. We then investigate how daily EPU affects the Kimchi premium, which is the ratio of the Bitcoin price in Korea to that in the United States, adjusted for the exchange rate. Our findings indicate that an increase in Korea's EPU makes Bitcoin more expensive in Korea, while the U.S. dollar strengthens against the Korean won. The stronger appreciation of the U.S. dollar outweighs the increase in Bitcoin prices, thereby lowering the Kimchi premium. Similarly, an increase in U.S. EPU has comparable but weaker effects. The appreciation of the U.S. dollar almost entirely offsets the higher relative price of Bitcoin in Korea, resulting in no significant impact on the Kimchi premium from changes in U.S. EPU. In addition, the results suggest that the Kimchi premium tends to rise with increased trading volume in Korea but decreases as trading volume increases in the United States. We also document that while the Kimchi premium is positively associated with Bitcoin price volatility in Korea, it is not significantly related to that in the United States.