Korea’s correlation with the U.S. and Japan decreased post-financial crisis.
Korea’s correlation with China increased significantly after 2008.
Trade linkages are the primary driver of stock market co-movements.
Financial linkages (foreign investment) had minimal impact on co-movements.
Industry-specific variations exist, with export-heavy industries more dependent on China.
Over-reliance on specific countries for trade poses financial stability risks.
Opinion
This study provides empirical evidence that the Korean stock market has shifted closer to China while reducing its correlation with the U.S. and Japan. This trend is largely driven by Korea’s growing trade dependence on China. Meanwhile, financial integration appears to have little impact, suggesting that institutional investors prioritize company fundamentals over broad market trends. Industry-level differences further highlight the risks of trade concentration. To maintain stability, Korea must pursue diversified trade policies to mitigate potential external shocks.
Core Sell Point
The co-movement of the Korean stock market is primarily driven by trade dependencies, with increasing alignment with China post-2008. Reducing over-reliance on a single country is essential for long-term market stability.
This study examines the degree of co-movement between the Korean stock market and the markets of the United States, Japan, and China. It analyzes key factors influencing these relationships using industry-level data from 2003 to 2016, applying an international capital asset pricing model (ICAPM).
1. Changes in Co-Movement After the Global Financial Crisis
Decreased correlation with the U.S. and Japan:
After the 2008–2009 global financial crisis, the correlation between the Korean stock market and those of the U.S. and Japan weakened.
This suggests that Korea’s economic ties with these countries became less influential, or that external factors had less impact on the Korean market.
Increased correlation with China:
The Korean stock market’s correlation with the Chinese market strengthened post-crisis.
This reflects growing economic interdependence between Korea and China, driven by increased trade and investment flows.
2. Trade Linkages as the Primary Driver of Co-Movement
Trade volume between Korea and other countries was identified as the main determinant of stock market co-movements.
Higher trade dependency on a particular country leads to stronger co-movements with its stock market.
Export-driven industries show greater sensitivity to the economic conditions of key trade partners.
3. Limited Influence of Financial Linkages
Foreign stock investment did not significantly impact market co-movements.
Institutional investors appear to focus more on fundamental valuations rather than short-term market trends.
Short-term speculative trading by foreign investors likely reduces the impact of capital flows on long-term co-movement trends.
4. Industry-Specific Differences
The study analyzed 24 manufacturing industries and found variations in co-movements based on trade dependency.
Industries highly dependent on Chinese exports exhibited stronger correlations with the Chinese stock market.
5. Policy Implications
Over-reliance on a single country for trade can increase market instability.
Diversifying trade relationships is crucial to reducing vulnerability to external economic shocks.
Financial policymakers should monitor global trade patterns to mitigate risks associated with concentrated trade dependencies.
Additional Insights
The study applied ICAPM to assess the global integration of Korea’s stock market.
Results highlight the growing economic interdependence between Korea and China, particularly post-2008.
The findings emphasize the importance of trade diversification to ensure market stability.
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