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Lead-lag relationship between macroeconomic variables and stock market: evidence from Korea

Aziz, Abdul and Masih, Mansur (2018): Lead-lag relationship between macroeconomic variables and stock market: evidence from Korea.

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Abstract

This study attempts to investigate whether share price index, specifically KOSPI of Korean Exchange, can be considered as a mirror or reflection of economic activities in Korea. The purpose is to make a finer point with respect to the relationship between economic growth and stock market especially in terms of stock prices. The present study proceeds with a single point investigative agenda as to what is the relationship between the health of the real economy and the health of the stock market? Does a rally in share prices reflect better health of the economy or it is the pink economic health that causes share prices to change?

We have examined the causal relationships between the share price index and other crucial macroeconomic variables namely money supply, exchange rate, consumer price index, and money market rate for the reason of right and robust model specification. The standard time series techniques have been employed. The present study reports causality running from economic growth to share price index and not the other way round. It may therefore be stated that the stock markets in Korea are demand driven and industry led which means that demand for greater equity finance is led by higher and improved economic performance. That is, the state of the economy has a bearing on the share prices but the health of the stock market in the sense of a rising share price index is not reflective of an improvement in the health of the economy. In other words, a Bull Run or rising prices in the stock market cannot be taken to be a leading indicator of the revival of the economy in Korea.

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