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

45 Pages Posted: 22 Jan 2018

See all articles by Jinsoo Lee

Jinsoo Lee

KDI School of Public Policy and Management

Bok-Keun Yu

The Bank of Korea

Date Written: January 22, 2018

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

JEL Classification: F15, F21, G15

Suggested Citation

Lee, Jinsoo and Yu, Bok-Keun, What Drives the Stock Market Comovements between Korea and China, Japan and the US? (January 22, 2018). Bank of Korea WP 2018-2. Available at SSRN: https://ssrn.com/abstract=3106444 or http://dx.doi.org/10.2139/ssrn.3106444

Jinsoo Lee (Contact Author)

KDI School of Public Policy and Management ( email )

P.O. Box 184
Seoul, 130-868
Korea, Republic of (South Korea)
822-3299-1060 (Phone)
822-968-5072 (Fax)

HOME PAGE: http://www.kdischool.ac.kr

Bok-Keun Yu

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

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