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


  • Jinsoo Lee

    () (KDI School of Public Policy and Management)

  • Bok-Keun Yu

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


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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    References listed on IDEAS

    1. Choi, Woon Gyu & Kang, Taesu & Kim, Geun-Young & Lee, Byongju, 2017. "Global liquidity transmission to emerging market economies, and their policy responses," Journal of International Economics, Elsevier, vol. 109(C), pages 153-166.
    2. Hyeongwoo Kim & Hyun Hak Kim & Wen Shi, 2015. "Forecasting Financial Stress Indices in Korea: A Factor Model Approach," Working Papers 2015-30, Economic Research Institute, Bank of Korea.
    3. Roll, Richard, 1992. " Industrial Structure and the Comparative Behavior of International Stock Market Indices," Journal of Finance, American Finance Association, vol. 47(1), pages 3-41, March.
    4. Jieun Lee & Jung-Min Kim & Jong Kook Shin, 2016. "US Interest Rate Policy Spillover and International Capital Flow: Evidence from Korea," Working Papers 2016-21, Economic Research Institute, Bank of Korea.
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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. repec:zbw:kdijep:200833 is not listed on IDEAS

    More about this item


    Stock market comovement; Trade linkage; Financial linkage;

    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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