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Stock Market Co-Movement and Exchange Rate Flexibility : Experience of the Republic of Korea

Author

Listed:
  • Yung Chul Park

    (Asian Development Bank Institute (ADBI))

  • Hail Park

Abstract

This paper argues that for countries where equity investments dominate cross-border capital flows, the proper framework for analyzing the role of a flexible exchange rate system as a buffer against external shocks is the uncovered stock return parity condition, rather than the uncovered interest parity condition. Estimation of the stock return parity condition shows that it fails to hold in the Republic of Korea largely because of co-movement in the Republic of Korea and United States stock markets. Three global factors are largely responsible for the co-movement : global financial integration, which may be generating a global financial cycle; acceptance of insensitivity of exchange risk by global equity investors; and domestic investors imitating the trading behavior of foreign equity investors.

Suggested Citation

  • Yung Chul Park & Hail Park, 2014. "Stock Market Co-Movement and Exchange Rate Flexibility : Experience of the Republic of Korea," Finance Working Papers 24162, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:financ:24162
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    File URL: http://www.eaber.org/node/24162
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    Keywords

    equity investment; cross-border capital flows; flexible exchange rate system; stock return parity condition; interest parity condition; the Republic of Korea; Stock Markets; co-movement;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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