Stock Market Returns and Economic Fundamentals in an Emerging Market: The Case of Korea
AbstractThis paper investigates the feedback relationship between stock market returns and economic fundamentals in an emerging market. Starting from an intertemporal consumption-based CAPM (CCAPM), we obtain a restricted VAR model for stock returns and macroeconomic variables. We then apply this model to Korea and find statistically significant departures from the restrictions implied by CCAPM. Consequently, an unrestricted VAR model is used to analyze the variations of expected and unexpected returns in the Korean stock market. It is shown that the expected market returns vary with a set of macroeconomic variables, and that the predictable component is substantial. Reflecting richer dynamics in the data, relative to the usual single equation modeling in the literature, the estimated VAR model shows considerable predictive ability for both real economic activity and real returns. Using the model for a variance decomposition of unexpected returns, we find that, although we cannot directly observe the market's revision of expected future dividend growth, we can estimate a large part of the revision with the news in the expected industry output growth from our VAR model. Finally, we also find that economic fundamentals can explain only a small portion of the variation in unexpected returns in the Korean stock market. Copyright Kluwer Academic Publishers 1997
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal Asia-Pacific Financial Markets.
Volume (Year): 4 (1997)
Issue (Month): 2 (May)
Contact details of provider:
Web page: http://springerlink.metapress.com/link.asp?id=102851
Asset Pricing; Consumption based CAPM; emerging markets; expected returns; unexpected returns; variance decomposition; vector autoregressive processes.;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Abel, .
"Stock Prices Under Time-Varying Dividend Risk: An Exact Solution in an Infinite-Horizon General Equilibrium Model,"
Rodney L. White Center for Financial Research Working Papers
15-88, Wharton School Rodney L. White Center for Financial Research.
- Abel, Andrew B., 1988. "Stock prices under time-varying dividend risk : An exact solution in an infinite-horizon general equilibrium model," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 375-393.
- Andrew B. Abel, 1989. "Stock Prices Under Time-Varying Dividend Risk: An Exact Solution In An Infinite-Horizon General Equilibrium Model," NBER Working Papers 2621, National Bureau of Economic Research, Inc.
- Greenwood, Jeremy & Jovanovic, Boyan, 1988.
"Financial Development, Growth, And The Distribution Of Income,"
88-12, C.V. Starr Center for Applied Economics, New York University.
- Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
- Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
- Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
- Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
- Cheung, Yin-Wong & He, Jia & Ng, Lilian, 1994.
"Pacific-Basin stock markets and real activity,"
Pacific-Basin Finance Journal,
Elsevier, vol. 2(2-3), pages 349-373, May.
- Arturo Estrella & Gikas A. Hardouvelis, 1989.
"The term structure as a predictor of real economic activity,"
8907, Federal Reserve Bank of New York.
- Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June.
- Kaul, Gautam, 1987. "Stock returns and inflation : The role of the monetary sector," Journal of Financial Economics, Elsevier, vol. 18(2), pages 253-276, June.
- Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
- Phillips, Peter C B & Ouliaris, S, 1990.
"Asymptotic Properties of Residual Based Tests for Cointegration,"
Econometric Society, vol. 58(1), pages 165-93, January.
- Tom Doan, . "POTESTRESIDS: RATS procedure to perform Phillips-Ouliaris-Hansen test for Cointegration on 1st stage residuals," Statistical Software Components RTS00248, Boston College Department of Economics.
- Tom Doan, . "POTEST: RATS procedure to perform Phillips-Ouliaris-Hansen test for Cointegration," Statistical Software Components RTS00247, Boston College Department of Economics.
- Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
- Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
- Schwert, G William, 1990.
" Stock Returns and Real Activity: A Century of Evidence,"
Journal of Finance,
American Finance Association, vol. 45(4), pages 1237-57, September.
- G. William Schwert, 1990. "Stock Returns and Real Activity: A Century of Evidence," NBER Working Papers 3296, National Bureau of Economic Research, Inc.
- Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
- Esref Savas BASCI & Süleyman Serdar KARACA, 2013. "The Determinants of Stock Market Index: VAR Approach to Turkish Stock Market," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 163-171.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.