Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
The Determinants of the Correlation between Stock and FX
Markets: Evidences from China, Japan and Korea
Young K. Park1, Suk-Joong Kim2 and Ki Beom Binh3
There exists significant relationship between stock and FX market returns in most
countries. The correlation between the two market segments is an essential
concept in portfolio theory and risk management. After the global financial, the
extreme value correlations and CoVaR emerges in financial systemic risk
literatures.In this paper, we put forward two hypotheses. First is “trade-driven”
correlation between stock market and FX market. The other is “foreign investors’
capital mobility-driven” correlation. Our major purpose is to investigate the time
varying nature of the correlations and examine their empirical determinants. We
find generally negative correlations for China and Korea which supports the
second hypothesis. On the other hand, the correlation for Japan is positive
supporting the first hypothesis. We conjecture that the relatively higher
performances of the Chinese and the Korean stock markets compared to that of
Japan may explain the results we report.
Keywords: trade-driven hypothesis, foreign investors’ capital mobility-driven
hypothesis, realized covariance, current account, financial account of portfolio equity
investment.
JEL: F21, F31, F37, F38, G15
1
2
3
Professor, Business School, Sungkyunkwan University, youngkpark01@gmail.com
Associate Professor, Business School , University of Sydney, sukjoong.kim@sydney.edu.au
Associate Professor, Department of Economics, Myongji University, bink1@mju.ac.kr