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Stock market co-movement and exchange rate flexibility : Experience of the Republic of Korea

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  • Stock market co-movement and exchange rate flexibility
  • Park, Yung Chul; Park, Hail
  • Asian Development Bank Institute


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Title Stock market co-movement and exchange rate flexibility
Similar Titles
Sub Title

Experience of the Republic of Korea

Material Type Reports
Author(English)

Park, Yung Chul; Park, Hail

Publisher

Tokyo:Asian Development Bank Institute

Date 2014-05
Series Title; No ADBI working paper series / 479
Pages 27
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Subject Economy < Economic Conditions
Holding Asian Development Bank Institute

Abstract

This paper argues that for countries where equity investments dominate cross-border capital flows, the proper framework for analyzing the role of a flexible exchange rate system as a buffer against external shocks is the uncovered stock return parity condition, rather than the uncovered interest parity condition. Estimation of the stock return parity condition shows that it fails to hold in the Republic of Korea largely because of co-movement in the Republic of Korea and United States stock markets. Three global factors are largely responsible for the co-movement: global financial integration, which may be generating a global financial cycle; acceptance of insensitivity of exchange risk by global equity investors; and domestic investors imitating the trading behavior of foreign equity investors.