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KDI - Korea Development Institute

KDI - Korea Development Institute



Policy Study Global Transmission of Financial Instability December 31, 2012


Series No. 2012-20

Policy Study KOR Global Transmission of Financial Instability #Macroprudential Policy #Risk Management #International Finance
DOI P-ISBN978-89-8063-700-3

December 31, 2012

  • KDI
    Kim, Young Il
This study aims to understand the transmission of financial turmoils across countries by analyzing the co-movement of stock markets. In addition, it attempts to figure out how the Korean stock market is exposed to the global markets by assessing potential determinants of the co-movement between Korean and the U.S. stock markets. Based on these results, policy implications are discussed to mitigate the international transmission of financial turmoils.

The DCC-GARCH model is employed and estimated to analyze the international co-movement of stock markets. It is found that the synchronization of volatility and returns of stock markets across countries have been strengthened while volatilities have converged to a similar level for major countries after the global financial crisis. In addition, common shocks seem to have contributed most to the strengthened synchronization of stock markets if shocks to stock returns were broken down into common and idiosynchratic components. Furthermore, the enhanced co-movement between stock markets during the global financial crisis can be explained by the worsening conditions of the short-term credit markets and the increased uncertainty of the global financial markets. These results imply that international cooperation may be sought to mitigate the international spillover of financial turmoils. Also, each country’s efforts could be sought to mitigate the negative impacts of the global financial turmoils as sovereign risks and foreign investors’ trading volumes may contribute to the propagation of financial turmoils.
요 약

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