Stock and bond returns correlation in Korea: Local versus global risk during crisis periods

Keehwan Park, Zhongzheng Fang and Young Ho Ha

Journal of Asian Economics, 2019, vol. 65, issue C

Abstract: This paper examines stock and bond returns correlation in Korea as an emerging market case study. The study covers the Asian financial crisis of 1997–1999 and the global financial crisis and European fiscal crisis of 2007–2012, plus non-crisis years that extend the sample period to 2005–2017. The sign of stock and bond returns correlation is shown to depend on the origin of risk triggering the crisis. In the local-risk driven crisis of 1997–1999, a flight to quality occurred across countries, causing stock and bond returns in Korea to decrease together. However, in the global-risk driven crises of 2007–2012, the flight to quality occurred across asset classes domestically, causing stock returns to decrease but bond returns to increase. Further, stock and bond returns correlation is found to relate systematically to changes in key macroeconomic variables, in particular, stock market volatility and a business leading indicator.

Keywords: Dynamic conditional correlation; Flight to quality; Local-risk driven crisis; Global-risk driven crisis; Stock market uncertainty; Country risk; Korea (search for similar items in EconPapers)
JEL-codes: E44 G10 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:65:y:2019:i:c:s1049007818303282

DOI: 10.1016/j.asieco.2019.101136

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