Structural shifts characterize the volatility of the Korean stock and foreign exchange markets during the 1997 Asian financial crisis. This paper employs an unrestricted bivariate GARCH-M model of stock market returns to investigate empirically the effects of daily currency depreciation on Korean stock market returns. The evidence shows that currency depreciation significantly affects stock market performance through three distinct channels: exchange rate depreciation adversely affects stock market returns, higher exchange rate depreciation volatility induces higher stock market returns, and exchange rate depreciation volatility raises stock market return volatility. The evidence suggests that small open stock markets are vulnerable to exchange rate movements.
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number
2002-30.
Length: 25 pages Date of creation: Sep 2002 Date of revision: Handle: RePEc:uct:uconnp:2002-30
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