East Asian Economic Review

Korea Institute for International Economic Policy (대외경제정책연구원)
권호 표지
DOI QR코드

DOI QR Code

Quantile Dependence between Foreign Exchange Market and Stock Market: The Case of Korea

  • Han, Heejoon (Department of Economics, Sungkyunkwan University) ;
  • Lee, Na Kyeong (Economic Research Institute, Sungkyunkwan University)
  • Received : 2016.07.22
  • Accepted : 2016.09.20
  • Published : 2016.12.31
Download PDF
⟨ Previous Next ⟩

Abstract

This paper examines quantile dependence and directional predictability between the foreign exchange market and the stock market in Korea. Instead of adopting a multivariate model such as a vector autoregressive model, a multivariate GARCH model or a combination of both models, we apply the cross-quantilogram recently proposed by Han et al. (2016). Considering various quantile ranges, we investigate various spillover effects between two markets. Our findings show that there exists an asymmetric bi-directional spillover between two markets and the interdependence between two markets implies that one market has significant predictive power on the other.

Keywords

References

  1. Abdalla, I. S. and V. Murinde. 1997. "Exchange Rate and Stock Price Interactions in Emerging Financial Markets: Evidence on India, Korea, Pakistan and the Philippines," Applied Financial Economics, vol. 7, no. 1, pp. 25-35. https://doi.org/10.1080/096031097333826
  2. Ajayi, R. A., Friedman, J. and S. M. Mehdian. 1998. "On the Relationship between Stock Returns and Exchange Rates: Tests of Granger Causality," Global Finance Journal, vol. 9, no. 2, pp. 241-251. https://doi.org/10.1016/S1044-0283(98)90006-0
  3. Ajayi, R. A. and M. Mougoue. 1996. "On the Dynamic Relation between Stock Prices and Exchange Rates," Journal of Financial Research, vol. 19, no. 2, pp. 193-207. https://doi.org/10.1111/j.1475-6803.1996.tb00593.x
  4. Baele, L. 2005. "Volatility Spillover Effects in European Equity Markets," Journal of Financial and Quantitative Analysis, vol. 40, no. 2, pp. 373-401. https://doi.org/10.1017/S0022109000002350
  5. Branson, W. H., Halttunen, H. and P. Masson. 1977. "Exchange Rates in the Short Run: The Dollar-Dentschemark Rate," European Economic Review, vol. 10, no. 3, pp. 303-324. https://doi.org/10.1016/S0014-2921(77)80002-0
  6. Dornbusch, R., Branson, W. H., Kenen, P., Houthakker, H., Hall, R. E., Lawrence, R., Perry, G., Fellner, W., Brainard, W. and G. von Furstenburg. 1980. "Exchange Rate Economics: Where Do We Stand?," Brookings Papers on Economic Activity, vol. 1980, no. 1, pp. 143-205. https://doi.org/10.2307/2534287
  7. Granger, C. W. J., Huang, B.-N. and C.-W. Yang. 2000. "A Bivariate Causality between Stock Prices and Exchange Rates: Evidence from Recent Asian Flu," Quarterly Review of Economics and Finance, vol. 40, no. 3, pp. 337-354. https://doi.org/10.1016/S1062-9769(00)00042-9
  8. Han, H., Linton, O., Oka, T. and Y.-J. Whang. 2016. "The Cross-Quantilogram: Measuring Quantile Dependence and Testing Directional Predictability between Time Series," Journal of Econometrics, vol. 193, no. 1, pp. 251-270. https://doi.org/10.1016/j.jeconom.2016.03.001
  9. Hatemi-J, A. and M. Irandoust. 2002. "On the Causality between Exchange Rates and Stock Prices: A Note," Bulletin of Economic Research, vol. 54, no. 2, pp. 197-203. https://doi.org/10.1111/1467-8586.00148
  10. I, Taly. 2015. "Study on Return and Volatility Spillover Effects Among Stock, CDS, and Foreign Exchange Markets in Korea," East Asian Economic Review, vol. 19, no. 3, pp. 275-322. https://doi.org/10.11644/KIEP.JEAI.2015.19.3.299
  11. In, F., Kim, S. B., Yoon, J. H. and C. Viney. 2001. "Dynamic Interdependence and Volatility Transmission of Asian Stock Markets: Evidence from the Asian Crisis," International Review of Financial Analysis, vol. 10, no. 1, pp. 87-96. https://doi.org/10.1016/S1057-5219(00)00045-4
  12. Jebran, K. and A. Iqbal. 2016. "Dynamics of Volatility Spillover between Stock Market and Foreign Exchange Market: Evidence from Asian Countries," Financial Innovation, vol. 2, issue 1, article 3, pp. 1-20. https://doi.org/10.1186/s40854-015-0019-0
  13. Kanas, A. 2000. "Volatility Spillovers between Stock Returns and Exchange Rate Changes: International Evidence," Journal of Business Finance and Accounting, vol. 27, no. 3-4, pp. 447-467. https://doi.org/10.1111/1468-5957.00320
  14. Kang, S. and S.-M. Yoon. 2012. "Spillover Effects between Exchange Rate and Stock Price in Asian Emerging Markets," Korean Journal of Financial Engineering, vol. 11, no. 2, pp. 147-165. (in Korean) https://doi.org/10.35527/kfedoi.2012.11.2.007
  15. Karolyi, G. A. 1995. "A Multivariate GARCH Models of International Transmission of Stock Returns and Volatility: The Case of United States and Canada," Journal of Business and Economic Statistics, vol. 13, no. 1, pp. 11-25.
  16. Lee, H.-J. and J.-O. Ahn. 2010. "A Study on the Relation between Foreign Exchange Rates and Stock Prices under Global Economic Crisis in Korea," Journal of Industrial Economics and Business, vol. 23, no. 6, pp. 3201-3222. (in Korean)
  17. Lee, K.-Y. 2007. "An Analysis of Interaction between Stocks and Exchange Rates," Kukje Kyungje Yongu, vol. 13, no. 2, pp. 55-82. (in Korean) https://doi.org/10.17298/kky.2007.13.2.003
  18. Linton, O. and Y.-J. Whang. 2007. "The Quantilogram: With an Application to Evaluating Directional Predictability," Journal of Econometrics, vol. 141, no. 1, pp. 250-282. https://doi.org/10.1016/j.jeconom.2007.01.004
  19. Ng, A. 2000. "Volatility Spillover Effects from Japan and the US to the Pacific-Basin," Journal of International Money and Finance, vol. 19, no. 2. pp. 207-233. https://doi.org/10.1016/S0261-5606(00)00006-1
  20. Pan, M.-S., Fok, R. C.-W. and Y. A. Liu. 2007. "Dynamic Linkages between Exchange Rates and Stock Prices: Evidence from East Asian Markets," International Review of Economics and Finance, vol. 16, no. 4, pp. 503-520. https://doi.org/10.1016/j.iref.2005.09.003
  21. Patton, A., Polits, D. N. and H. White. 2009. "Correction to 'Automatic Block-Length Selection for Dependent Bootstrap' by D. Politis and H. White," Econometric Reviews, vol. 28, no. 4, pp. 372-375. https://doi.org/10.1080/07474930802459016
  22. Politis, D. N. and H. White. 2004. "Automatic Block-Length Selection for Dependent Bootstrap," Econometric Reviews, vol. 23, no. 1, pp. 53-70. https://doi.org/10.1081/ETC-120028836
  23. Politis, D. N. and J. P. Romano. 1994. "The Stationary Bootstrap," Journal of the American Statistical Association, vol. 89, no. 428, pp. 1303-1313. https://doi.org/10.1080/01621459.1994.10476870
  24. Sims, C. A. 1980. "Macroeconomics and Reality," Econometrica, vol. 48, no. 1, pp. 1-48. https://doi.org/10.2307/1912017
  25. Wu, R.-S. 2005. "International Transmission Effect of Volatility between the Financial Markets during the Asian financial Crisis," Transition Studies Review, vol. 12, no. 1, pp. 19-35. https://doi.org/10.1007/s11300-005-0032-5
  26. Wu, Y. 2000. "Stock Prices and Exchange Rates in VEC Model- The Case of Singapore in the 1990s," Journal of Economics and Finance, vol. 24, no. 3, pp. 260-274. https://doi.org/10.1007/BF02752607
  27. Yang, S.-Y. and S.-C. Doong. 2004. "Price and Volatility Spillover between Stock Prices and Exchange Rates: Empirical Evidence from the G-7 Countries," International Journal of Business and Economics, vol. 3, no. 2, pp. 139-153.