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.

Analyzing the Dynamics Between Macroeconomic Variables and the Stock Indexes of Emerging Markets, Using Non-linear Methods

“…Signs of nonlinearity have also been reported in several studies (see, e.g., Lardic and Mignon, 2008;Zhang, 2017). A recent study by Lee and Ryu (2018) shows that stock price shocks respond insignificantly to macroeconomic variables under simple ARDL, whereas a significant and negative long-run effect is found for almost every explanatory variable, a market pair under the nonlinear model. The nonlinear ARDL is also used in Alqaralleh (2020), in which the author highlights that responses of stock return to macroeconomic variables are generally asymmetric.…”

“…The issue of incorporating nonlinearity in the relationship between the aggregate stock price level and the macroeconomic variables in an empirical analysis has received considerable critical attention. Drawing on the seminal papers (among others; Yang et al 2018;Lee and Ryu, 2018;Han et al, 2012;Lee and Ryu, 2013) that highlight the asymmetric response of stock returns to related macroeconomic variables, we see that different variables have been found n previous studies to be included in order to empirically investigate this relationship. This study uses the following general specification:…”

Volatility Spillovers between Equity and Green Bond Markets

“…Volatility dynamics are an on-going hot research topic in the field of economics (Kim, Park, and Ryu, 2018 [24]; Ryu, 2015a, 2015b [25,26]; Chun, Cho, and Ryu, 2019, 2020 [27,28]; Ryu, 2014a, 2014b [29,30]). For example, some previous studies analyze the relationship between volatility movements and economic factors in financial markets (Shim, Kim, Kim, and Ryu, 2015 [31]; Lee and Ryu, 2018 [32]; Lee and Ryu, 2019 [33]). Other studies examine the return and volatility transmissions between related markets (Guo, Han, Liu, and Ryu, 2013 [34]; Kim, Ryu, Seo, 2015 [35]; Lee, Kang, and Ryu, 2015 [36]; Lee and Ryu, 2016 [37]; Lee, Lee, and Ryu, 2019 [38]).…”

Identifying Significant Macroeconomic Indicators for Indian Stock Markets

“…Lee and Ryu [26] found that the macroeconomic indicators do not affect when analyzed with the linear model, while all the macroeconomic indicators influence the stock market when an analysis was performed using a nonlinear model.…”