Currency depreciation and Korean stock market performance during the Asian financial crisis. Economics Working Papers

Structural shifts characterize the volatility of the Korean stock and foreign ex-change markets during the 1997 Asian financial crisis. This paper employs an unrestricted bivariate GARCH-M model of stock market returns to investigate empirically the effects of daily currency depreciation on Korean stock market re-turns. The evidence shows that currency depreciation significantly affects stock market performance through three distinct channels: exchange rate depreciation adversely affects stock market returns, higher exchange rate depreciation volatil-ity induces higher stock market returns, and exchange rate depreciation volatility raises stock market return volatility. The evidence suggests that small open stock markets are vulnerable to exchange rate movements. Currency Depreciation and Korean Stock Market Performance during th