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What Drives the Stock Market Comovements between Korea and China, Japan and the US?

Author

Listed:
  • Jinsoo Lee

    (KDI School of Public Policy and Management)

  • Bok-Keun Yu

    (Micro & Institutional Economics Team, Economic Research Institute, The Bank of Korea)

Abstract

This paper measures the extent of comovements in stock returns between Korea and three major countries (China, Japan and the US) using the industry-level data for Korea from 2003 to 2016, in the spirit of the international capital asset pricing model. It also examines what drives the comovements between Korea and the three countries. We find that the comovements of the Korean stock returns with those of the US and Japan became smaller after the global financial crisis. In contrast, the comovement in stock returns between Korea and China became larger after the crisis. After an additional analysis, we conclude that trade linkage is the main driver of the comovements between Korea and the three countries. Our finding suggests that the concentration of trade with some trading partners can be a destabilizing factor in the domestic financial market if there is a negative shock to trade with those partners. Thus, it is important for Korea to diversify trade with foreign countries to keep its financial market more stable.

Suggested Citation

  • Jinsoo Lee & Bok-Keun Yu, 2018. "What Drives the Stock Market Comovements between Korea and China, Japan and the US?," Working Papers 2018-2, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1802
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    File URL: http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2018-2.pdf
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    References listed on IDEAS

    as
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    9. Geun-Young Kim & Hail Park & Peter Tillmann, 2016. "The Spillover Effects of U.S. Monetary Policy on Emerging Market Economies: Breaks, Asymmetries and Fundamentals," Working Papers 2016-1, Economic Research Institute, Bank of Korea.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jinsoo Lee & Bok-Keun Yu, 2018. "The Effects of Export Diversification on Macroeconomic Stabilization : Evidence from Korea," Working Papers 2018-25, Economic Research Institute, Bank of Korea.
    2. Yongseung Han & Myeong Hwan Kim, 2023. "Monetary shocks on the Korean stock index: structural VAR analysis," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 13(1), pages 85-102, March.
    3. Choi, Seungmoon, 2018. "Comparison of the Korean and US Stock Markets Using Continuous-time Stochastic Volatility Models," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 40(4), pages 1-22.
    4. Lee, Jinsoo & Yu, Bok-Keun, 2019. "The Effects of Export Diversification on Macroeconomic Stabilization: Evidence from Korea," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 41(1), pages 1-14.

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    More about this item

    Keywords

    Stock market comovement; Trade linkage; Financial linkage;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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