How the Republic of Korea's Financial Structure Affects the Volatility of Four Asset Prices
The authors explore how Koreas financial structure affects the volatility of asset prices. Documented empirical evidence of the relationship between financial structure and financial crisis, sheds light on the relationship between asset price volat...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/04/437747/republic-koreas-financial-structure-affects-volatility-four-asset-prices http://hdl.handle.net/10986/22192 |
| Summary: | The authors explore how Koreas financial
structure affects the volatility of asset prices. Documented
empirical evidence of the relationship between financial
structure and financial crisis, sheds light on the
relationship between asset price volatility - extreme
variations in price - and financial structure. And the
volatility of financial and non-financial asset prices
provides an indirect link between an economys financial
structure and the likelihood of financial crisis. Using
time-series data on a se of indicators measuring financial
structure, the authors examine how Koreas financial
structure affects the volatility of the real effective
exchange rate, the money market rate, government bond
yields, and stock prices. They find: 1) There is a stable
long-term relationship between financial structure and
volatility in the real effective exchange rate, the money
market rate, stock prices, and the yield on government
housing bonds. 2) Financial structure affects asset price
variables asymmetrically. Some variables volatility
increases, and others diminish, suggesting that monetary
policies should target different asset markets to achieve
different goals. If the goal of the monetary authority is to
stabilize the money market rate, for example, intervening in
the banking sector is more efficient than intervening in
other financial sub-sectors. 3) The higher volatility of
stock prices reflects the thin stock market in Korea. 4) The
stability of the yield on government housing bonds reflects
the Korean governments policy of stabilizing the nations
housing supply by isolating the housing market from the
impact of Koreas financial structure. 5) Restrictions on
foreigners ownership of domestic stock in Korea during the
period analyzed, and the fact that most capital flows
through commercial banks, affect the exchange rate, which is
determined (at least in the short run) by capital flows in
the foreign exchange market. |
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