The Korean Journal of Economic Studies
Distributional Relationship between the Korean and the U.S. Stock Markets Analyzed by a Functional Regression Approach
Gyung Mo Kim (Sungkyunkwan University) and Heejoon Han (Sungkyunkwan University)Year 2019Vol. 67No. 2
AbstractThis paper investigates spillover effects from the U.S. stock market to theKorean stock market by considering a functional regression model. Instead ofusing stock market indices, we consider cross-sectional distributions of allstock returns that comprise the KOSPI index and the S&P 500 index. We usedaily data from January 2005 to December 2013 and consider threesubsamples: pre-crisis, crisis and post-crisis period. We estimate a functionalregression model and adopt novel econometric tools recently proposed by Huet al. (2016) to analyze the relationship between cross-sectional distributionsof two stock markets. We use response functions to examine how eachmoment and tail probability of the Korean stock market distribution react toshocks in the US stock market distribution. We also conduct variancedecomposition and provide interpretations on spillover effect from the U.S.stock market to the Korean stock market. The spillover effects to mean,variance and left tail probability were higher in the post-crisis period than inthe pre-crisis period and were the highest during the crisis period. On thecontrary, the spillover effect to right tail probability was the highest in thepost-crisis period.