Revisited Return and Volatility Spillover Effect in Korea

This paper investigates the price returns and volatility linkages between the foreign exchange (KRW) and stock (KOSPI) markets in Korea, using the cointegration test, and bivariate GJR-GARCH model. Our findings from empirical analysis are summarized as follows. First, there is no long-term equilibrium relationship between the KRW and KOSPI markets. Second, exogenous variables (yen/dollar exchange rate and S&P 500 index) have strong impact on the returns of both the KRW and KOSPI. Third, with regard to return spillover, a uni-directional volatility spillover exists from the KOSPI market to the KRW market. Fourth, our empirical results provide no evidence of volatility spillover effect in the pre-crisis, but an evidence of uni-directional volatility spillover effect from the KRW market to the KOSPI market in the post-crisis period, implying that financial crisis improves linkages between these two markets. Finally, we do not find the asymmetric volatility spillover effect between two markets. Thus, investors in the Korean stock market and/or the foreign exchange market need to consider the relationship between these two markets as part of their investment decisions.