An Exploration of Dynamical Relationships Between Macroeconomic Variables and Stock Prices in Korea

Jung Wan Lee, Tantatape Brahmasrene / Journal of Asian Finance, Economics and Business Vol 5 No 3 (2018) 7-17

12 Pages Posted: 8 Oct 2018

See all articles by Jung Wan Lee

Jung Wan Lee

Boston University - Department of Administrative Sciences

Tantatape Brahmasrene

Purdue University North Central

Date Written: July 30, 2018

Abstract

This paper examines short-run and long-run dynamic relationships between selected macroeconomic variables and stock prices in the Korea Stock Exchange. The data is restricted to the period for which monthly data are available from January 1986 to October 2016 (370 observations) retrieved from the Economic Statistics System database sponsored by the Bank of Korea. The study employs unit root test, cointegration test, vector error correction estimates, impulse response test, and structural break test. The results of the Johansen cointegration test indicate at least three cointegrating equations exist at the 0.05 level in the model, confirming that there is a long-run equilibrium relationship between stock prices and macroeconomic variables in Korea. The results of vector error correction model (VECM) estimates indicate that money supply and short-term interest rate are not related to stock prices in the short-run. However, exchange rate is positively related to stock prices while the industrial production index and inflation are negatively related to stock prices in the short-run. Furthermore, the VECM estimates indicate that the external shock, such as regional and global financial crisis shocks, neither affects changes in the endogenous variables nor causes instability in the cointegrating vector. This study finds that the endogenous variables are determined by their own dynamics in the model.

Keywords: Stock Prices, Exchange Rate, Macroeconomic Variables, Global Financial Crisis, Korea

JEL Classification: G15, F31, E44, F37, G01

Suggested Citation

Lee, Jung Wan and Brahmasrene, Tantatape, An Exploration of Dynamical Relationships Between Macroeconomic Variables and Stock Prices in Korea (July 30, 2018). Jung Wan Lee, Tantatape Brahmasrene / Journal of Asian Finance, Economics and Business Vol 5 No 3 (2018) 7-17 . Available at SSRN: https://ssrn.com/abstract=3250131

Jung Wan Lee (Contact Author)

Boston University - Department of Administrative Sciences ( email )

808 Commonwealth Avenue
Boston, MA 02215
United States
617 358 5627 (Phone)
617 353 6840 (Fax)

HOME PAGE: http://www.bu.edu/met

Tantatape Brahmasrene

Purdue University North Central ( email )

1401 South US 421
Westville, IN 46391
United States

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