Transmission of Stock Returns and Volatility: The Case of Korea

Abstract

The extent of international financial integration among the developed economies has been well documented in the literature. This paper examines whether there are lagged spillovers in return and volatility between the U.S. and Korea, an emerging economy, for a sample period including the financial crisis of 1977. Using open-to-close KOSPI and S&P 500 returns, this paper finds statistically significant lagged volatility spillovers from Korea to the U.S. but not from the U.S. to Korea. This paper also finds that statistically significant lagged return spillovers do not exist in neither the Korean nor the U.S. stock markets. Thus, that domestic market efficiently adjusts to foreign information holds even for an emerging market. Finally, this paper finds that when KOSPI returns measured in U.S. dollars are used, statistically significant lagged return spillovers exist from the U.S. to Korea but not from Korea to the U.S. This paper concludes that the lagged return spillovers with returns measured in U.S. dollars may result from the way the Korean government has intervened in the KRW/USD foreign exchange market.

Keywords: Spillover, Stock Returns, Volatility, GARCH.

JEL Classification: G15