Market‐wide shocks and the predictive power for the real economy in the Korean stock market

Jinyong Kim and Yongsik Kim

Pacific Economic Review, 2022, vol. 27, issue 4, 380-399

Abstract: We examine the predictive power of the stock market return for real economic growth corresponding to market‐wide shocks in Korea. The periods of large market‐wide shocks, such as the COVID‐19 pandemic, are characterized by the stock return synchronicity and volatility that can measure price informativeness. We find that the predictive power of the stock market return disappears when stock returns show high synchronicity and volatility, and the deteriorated predictive power is associated with an increase in individual investors' net buying shares. Our finding suggests that, even if the stock market shows outstanding performance following market‐wide shocks, this signal should be interpreted with caution because the stock market return may become less informative about fundamentals and lose the predictive power for the real economy.

Date: 2022
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https://doi.org/10.1111/1468-0106.12405

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