Asymmetry in the stock price response to macroeconomic shocks: evidence from the Korean market
Abstract
This study investigates stock price movements in response to macroeconomic shocks, allowing for asymmetry in this relationship. Given Ferson’s (1989) finding that large and small stocks can exhibit different risk behaviors, we examine the behaviors of the KOSPI and KOSDAQ stock markets in response to changes in the price level, real interest rate, and real USD/KRW exchange rate using simple and nonlinear autoregressive-distributed lag (ARDL) models. We find that the long-run effects of macroeconomic shocks are relatively insignificant under the simple ARDL model, whereas a significant and negative long-run effect is found for almost every explanatory variable–market pair under the nonlinear model. In addition, we find that the long-run effects of stock price shocks on macroeconomic variables are more significant under the nonlinear model. Overall, the results imply that it is difficult to identify the relationship between macroeconomic variables and stock price dynamics without considering asymmetry.
Keyword : asymmetric relationship, autoregressive-distributed lag, emerging market, macroeconomic shocks, KOSDAQ, KOSPI
How to Cite
Lee, G., & Ryu, D. (2018). Asymmetry in the stock price response to macroeconomic shocks: evidence from the Korean market. Journal of Business Economics and Management, 19(2), 343-359. https://doi.org/10.3846/jbem.2018.5563
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Kim, H., Cho, H., & Ryu, D. (forthcoming). Characteristics of mortgage terminations: an analysis of a loan-level dataset. Journal of Real Estate Finance and Economics. https://doi.org/10.1007/s11146-017-9620-5
Lee, W. (1997). Market timing and short-term interest rates. Journal of Portfolio Management, 23(3), 35-46. https://doi.org/10.3905/jpm.1997.409604
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Bewley, R. (1979). The direct estimation of equilibrium response in a linear dynamic model. Economics Letters, 3(4), 357-361. https://doi.org/10.1016/0165-1765(79)90011-9
Bianchi, D., Guidolin, M., & Ravazzolo, F. (2017). Macroeconomic factors strike back: a Bayesian change-point model of time-varying risk exposures and premia in the U.S. cross-section. Journal of Business and Economic Statistics, 35(1), 110-129. https://doi.org/10.1080/07350015.2015.1061436
Chan, K. C., Chen, N., & Hsieh, D. A. (1985). An explanatory investigation of the firm size effect. Journal of Financial Economics, 14(3), 451-471. https://doi.org/10.1016/0304-405X(85)90008-X
Chan, L., Karceski, J., & Lakonishok, J. (1998). The risk and return from factors. Journal of Financial and Quantitative Analysis, 33(2), 159-188. https://doi.org/10.2307/2331306
Chen, N., Roll, R., & Ross, S. A. (1986). Economic forces and the stock market. Journal of Business, 59(3), 383-403. https://doi.org/10.1086/296344
Chow, G. C., & Lin, A. (1971). Best linear unbiased interpolation, distribution and extrapolation of time series by related series. Review of Economics and Statistics, 53(4), 372-375. https://doi.org/10.2307/1928739
Christie, A. A. (1982). The stochastic behavior of common stock variances: value, leverage and interest rate effects. Journal of financial Economics, 10(4), 407-432. https://doi.org/10.1016/0304-405X(82)90018-6
Chung, C. Y., Kang, S., & Ryu, D. (2018). Does institutional monitoring matter? Evidence from insider trading by information risk level. Investment Analysts Journal, 47(1), 48-64. https://doi.org/10.1080/10293523.2017.1413152
Chung, K. H., Park, S. G., & Ryu, D. (2016). Trade duration, informed trading, and option moneyness. International Review of Economics and Finance, 44, 395-411. https://doi.org/10.1016/j.iref.2016.02.003
Crowder, W. J. (2006). The interaction of monetary policy and stock returns. Journal of Financial Research, 29(4), 523-535. https://doi.org/10.1111/j.1475-6803.2006.00192.x
Cutler, D. M., Poterba, J. M., & Summers, L. H. (1989). What moves stock prices? Journal of Portfolio Management, 15(3), 4-12. https://doi.org/10.3905/jpm.1989.409212
Fama, E. F. (1981). Stock returns, real activity, inflation and money. American Economic Review, 71(4), 545-565.
Flannery, M. J., & James, C. M. (1984). The effect of interest rate changes on the common stock returns of financial institutions. Journal of Finance, 39(4), 1141-1153. https://doi.org/10.1111/j.1540-6261.1984.tb03898.x
Flannery, M. J., & Protopapadakis, A. A. (2002). Macroeconomic factors do influence aggregate stock returns. Review of Financial Studies, 15(3), 751-782. https://doi.org/10.1093/rfs/15.3.751
Geske, R., & Roll, R. (1983). The monetary and fiscal linkage between stock returns and inflation. Journal of Finance, 38(1), 1-33. https://doi.org/10.1111/j.1540-6261.1983.tb03623.x
Griffin, J. M., & Stulz, R. M. (2001). International competition and exchange rate shocks: a cross-country industry analysis of stock returns. Review of Financial Studies, 14(1), 215-241. https://doi.org/10.1093/rfs/14.1.215
Guidolin, M., Hyde, S., McMillan, D., & Ono, S. (2014). Does the macroeconomy predict UK asset returns in a nonlinear fashion? Comprehensive out-of-sample evidence. Oxford Bulletin of Economics and Statistics, 76(4), 510-535. https://doi.org/10.1111/obes.12035
Han, Q., Guo, B., Ryu, D., & Webb, R. I. (2012). Asymmetric and negative return-volatility relationship: The case of the VKOSPI. Investment Analysts Journal, 41, 69-78. https://doi.org/10.1080/10293523.2012.11082551
Han, H., Kutan, A. M., & Ryu, D. (2015). Effects of the US stock market return and volatility on the VKOSPI. Economics: Open-Access, Open-Assessment E-Journal, 9(35), 1-34. https://doi.org/10.5018/economics-ejournal.ja.2015-35
Harasty, H., & Roulet, J. (2000). Modeling stock market returns. Journal of Portfolio Management, 26(2), 33-46. https://doi.org/10.3905/jpm.2000.319747
Jensen, G. R., Johnson, R. R., & Bauman, W. S. (1997). Federal reserve monetary policy and industry stock returns. Journal of Business Finance and Accounting, 24(5), 629-644. https://doi.org/10.1111/1468-5957.00125
Kim, K. (2003). Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model. Review of Financial Economics, 12(3), 301-313. https://doi.org/10.1016/S1058-3300(03)00026-0
Kim, H., Cho, H., & Ryu, D. (forthcoming). Characteristics of mortgage terminations: an analysis of a loan-level dataset. Journal of Real Estate Finance and Economics. https://doi.org/10.1007/s11146-017-9620-5
Lee, W. (1997). Market timing and short-term interest rates. Journal of Portfolio Management, 23(3), 35-46. https://doi.org/10.3905/jpm.1997.409604
Lee, B. S. (2010). Stock returns and inflation revisited: an evaluation of the inflation illusion hypothesis. Journal of Banking and Finance, 34(6), 1257-1273. https://doi.org/10.1016/j.jbankfin.2009.11.023
Lee, J., Ryu, D., & Kutan A. M. (2016). Monetary policy announcements, communication, and stock market liquidity. Australian Economic Papers, 55(3), 227-250. https://doi.org/10.1111/1467-8454.12069
Ma, C. K., & Kao, G. W. (1990). On exchange rate changes and stock price reactions. Journal of Business Finance and Accounting, 17(3), 441-449. https://doi.org/10.1111/j.1468-5957.1990.tb01196.x
MacKinnon, J. G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11(6), 601-618. https://doi.org/10.1002/(SICI)1099-1255(199611)11:6<601::AID-JAE417>3.0.CO;2-T
Maasoumi, E., & Racine, J. (2002). Entropy and predictability of stock market returns. Journal of Econometrics, 107(1), 291-312. https://doi.org/10.1016/S0304-4076(01)00125-7
Modigliani, F., & Cohn, R. A. (1979). Inflation, rational valuation and the market. Financial Analysts Journal, 35(2), 24-44. https://doi.org/10.2469/faj.v35.n2.24
Moore, T., & Wang, P. (2014). Dynamic linkage between real exchange rates and stock prices: evidence from developed and emerging Asian markets. International Review of Economics and Finance, 29, 1-11. https://doi.org/10.1016/j.iref.2013.02.004
Newey, W. K., & West, K. D. (1987). A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica, 55(3), 703-708. https://doi.org/10.2307/1913610
Pesaran, M. H., & Shin, Y. (1999). An autoregressive distributed lag modelling approach to cointegration analysis. In S. Strøm (Ed.), Econometrics and Economic Theory in the 20th Century: the Ragnar Frisch Centennial Symposium. Cambridge: Cambridge University Press. https://doi.org/10.1017/CCOL521633230.011
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616
Qi, M. (1999). Nonlinear predictability of stock returns using financial and economic variables. Journal of Business and Economic Statistics, 17(4), 419-429. https://doi.org/10.1080/07350015.1999.10524830
Rapach, D. E. (2001). Macro shocks and real stock prices. Journal of Economics and Business, 53(1), 5-26. https://doi.org/10.1016/S0148-6195(00)00037-0
Richards, A. (2005). Big fish in small ponds: the trading behavior and price impact of foreign investors in Asian emerging equity markets. Journal of Financial and Quantitative Analysis, 40(1), 1-27. https://doi.org/10.1017/S0022109000001721
Ritter, J. R., & Warr, R. S. (2002). The decline of inflation and the bull market of 1982-1999. Journal of Financial and Quantitative Analysis, 37(1), 29-61. https://doi.org/10.2307/3594994
Ryu, D. (2011). Intraday price formation and bid-ask spread components: a new approach using a cross-market model. Journal of Futures Markets, 31(12), 1142-1169. https://doi.org/10.1002/fut.20533
Ryu, D. (2013). Price impact asymmetry of futures trades: trade direction and trade size. Emerging Markets Review, 14, 110-130. https://doi.org/10.1016/j.ememar.2012.11.005
Ryu, D. (2015). The information content of trades: an analysis of KOSPI 200 index derivatives. Journal of Futures Markets, 35(3), 201-221. https://doi.org/10.1002/fut.21637
Ryu, D. (2016). Considering all microstructure effects: the extension of a trade indicator model. Economics Letters, 146, 107-110. https://doi.org/10.1016/j.econlet.2016.07.025
Ryu, D., Kim, H., & Yang, H. (2017). Investor sentiment, trading behavior and stock returns. Applied Economics Letters, 24(12), 826-830. https://doi.org/10.1080/13504851.2016.1231890
Ryu, D., Ryu, D., & Hwang, J. H. (2017). Corporate governance, product-market competition, and stock returns: evidence from the Korean market. Asian Business and Management, 16(1-2), 50-91. https://doi.org/10.1057/s41291-017-0014-6
Ryu, D., & Shim, H. (2017). Intraday dynamics of asset returns, trading activities, and implied volatilities: a trivariate GARCH framework. Romanian Journal of Economic Forecasting, 20(2), 45-61.
Schwert, G. W. (1981). The adjustment of stock prices to information about information. Journal of Finance, 36(1), 15-29. https://doi.org/10.1111/j.1540-6261.1981.tb03531.x
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