Comovement between Korean Stock and Government Bond Markets

Abstract

This paper investigates an impact of market's expectation for future financial market uncertainty on comovement(realized correlations) between Korean equity and 5 year government bond markets from 4th January 2001 to 30th June 2008. We find evidence that the lower financial uncertainty is associated with an increased time-variation in comovement between Korean stock and government bond markets. The government bond yield has a positive relation with the KVIX whereas the stock return has a negative one with it. These findings support a flight to quality hypothesis that market participants readjust their portfolios to a safer asset(i.e. government bond) in times of financial uncertainty in Korean security market. Thus, Our study provide investors and policy makers with valuable implications to improve a portfolio diversification and to coordinate a macroeconomic policy for stabilizing the financial system in the country.