An Empirical Analysis of the Relationship between Monetary Policy and Stock Returns in Korea and Its Implications (in Korean)

Sangkyu Lee (), Yang Woo Kim () and Joonmyung Woo ()
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Sangkyu Lee: Department of Economics, Kyung Hee University
Yang Woo Kim: The Bank of Korea
Joonmyung Woo: The Bank of Korea

Economic Analysis (Quarterly), 2010, vol. 16, issue 1, 37-70

Abstract: This paper conducts an empirical analysis of stock market transmission channel of monetary policy, combining the recent findings in financial economics about the predictability of stock returns and those in monetary economics about the stock market channel of monetary policy. We focus mainly on the relationship between shifts in monetary policy indicator variable and the long-term predictability of excess stock returns in Korea. According to our empirical analysis using a short-horizon standard-form VAR model and a dynamic accounting identity of excess stock returns for the period from March, 1992 to June, 2008, a monetary policy indicator variable appears to exert significant influences on excess stock returns over the long-term horizon in a theoretically expected direction and to play a key role in explaining the variance of unexpected excess stock returns. In particular, we find that monetary policy shocks have transmitted into the variance of unexpected excess stock returns mainly through the channel of future dividend growth rates.

Keywords: Call rates; Monetary policy shock; Stock market transmission channel; Excess stock returns; Dynamic accounting identity of excess stock returns (search for similar items in EconPapers)
JEL-codes: E52 G12 (search for similar items in EconPapers)
Date: 2010
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