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

Jinsoo Lee () and Bok-Keun Yu ()
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Jinsoo Lee: KDI School of Public Policy and Management
Bok-Keun Yu: Micro & Institutional Economics Team, Economic Research Institute, The Bank of Korea

No 2018-2, Working Papers from Economic Research Institute, Bank of Korea

Abstract: 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.

Keywords: Stock market comovement; Trade linkage; Financial linkage (search for similar items in EconPapers)
JEL-codes: F15 F21 G15 (search for similar items in EconPapers)
Date: 2018-01-22
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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2018-2.pdf Working Paper, 2018 (application/pdf)

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