An Exploration of Dynamic Relationships between Macroeconomic Variables and Stock Prices in Korea Revisited

The paper revisits the authors’ previous paper to examine short-run and long-run dynamic relationships between macroeconomic variables and stock prices in Korea. The data is updated to the period for which monthly data are available from January 1986 to June 2018 (390 observations) retrieved from the Bank of Korea. The results of Johansen cointegration test indicate that at least one cointegrating equation exists confirming that there is a long-run equilibrium relationship between macroeconomic variables and stock prices in Korea. The results of vector error correction estimates confirm that 1) the coefficient of the error correction term is significant with a negative sign, which is, a long-run dynamic relationship between macroeconomic variables and stock prices is observed. 2) For short-run dynamics, the nominal exchange rate of the Korean won per the US dollar is positively related to stock prices while interest rates are negatively related to stock prices in the short-run. 3) The coefficient of the global financial crises is insignificant, that is, the changes of stock prices are determined largely by their own dynamics in the model. The result suggests only that the global financial crises do not cause instability in the cointegrating vector nor affect significant changes in the endogenous variables in the model