Foreign currency crisis and semi-strong efficiency of the Korean stock market

This paper investigated the efficiency of the Korean capital market with respect to fiscal and monetary policies. For this purpose, the paper applied FIML technique to a set of monthly data over the period 1982.01 to 2000.12. The model was particularly designed to take into the problems of generated regressors and simultaneous equation bias in the test of market efficiency. The overall results indicate that the Korean stock market is efficient with respect to monetary policy. However, the result with fiscal policy is inconclusive. The study also found that market participants reacted to the macro-economic shocks more sensitively after the recent foreign currency crisis in Korea. However, there is no concrete evidence that the stock market opening contributed to the market efficiency.UnpublishedNon Peer ReviewedAli, S., and M. A. Hasan, "Is the Canadian Stock Market Efficient with Respect to Fiscal Policy? Some Vector Autoregression Results," Journal of Economics and Business, 1993, pp 4959. Darrat, A., "On Fiscal Policy and the Stock Market," Journal of Money, Credit and Banking 20, 1988, pp 353362. Darrat, A., and J. Brocato, "Stock Market Efficiency and the Federal Budget Deficit: Another Anomaly?" Financial Review 29, 1994, pp 4975. Davidson, L. S., and R. T. Froyen, "Monetary Policy and Stock Returns: Are Stock Markets Efficient?" Federal Reserve Bank of St. Louis 64, 1982, pp 312. Fama, E. F. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance 25, 1970, pp 383417. Fama, E. F. and G. W. Schwert, "Asset Returns and Inflation," Journal of Financial Economics, 5, 1977, pp 115-146. Glick, R., and M. Hutchison, “ New Results in support of the Fiscal Policy Ineffectiveness Proposition,” Journal of Money, Credit, and Banking, 22, 1990, pp 288-304. Groenewold, N., and K. C. Kang, "The Semi-Strong Efficiency of the Australian Share Market," The Economic Record 69, 1993, pp 405410. Johnsoton, J., Econometric Methods, 3rd ed., McGraw Hill, New York, 1984, Kawakatsu, H. and M. R. Morey, “Finacial Liberalization and Stock Market Efficiency: an Empirical Examination of Nine Emerging Market Countries,” Journal of Mulitnational Financial Management, 9, 1999, pp 353-371 Laumas, G.S., and W. D. McMillin, “Anticipated Fiscal Policy and Real Output,” Review of Economics and Statistics, 66, 1984, pp 468-71 McKenzie, C.R., and M. McAleer, "On the Effect of Misspecification Errors in Models with Generated Regressors," Oxford Bulletin of Economics & Statistics 56, 1994, pp 441~455. Murphy, K. M., and R. H. Topel, "Estimation and Inference in Two-Step Econometric Models," Journal of Business and Economic Statistics 3, 1985, pp 370379. Oxley, L., and M. McAleer ; 1993, "Econometric Issues in Macroeconomic Models with Generated Regressors", Journal of Economic Survey , 7, 1-40 Pagan, A., "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review 25, 1984, pp 221247. Rozeff, M. S., "Money and Stock Prices," Journal of Financial Economics 1, 1974, pp 245302. Saunders, A. and R.B. Tress; 1981, “Inflation and Stock Market Returns: Some Australian Evidence”, Economic Record, (Mar.), 58-66. Schmidt, P.; 1976, Econometrics, Marcel Dekker, New York Smith, J., and M. McAleer, "Newey-West Covariance Matrix Estimates for Models with Generated Regressors," Applied Economics 26, 1994, pp 635~640. Sorensen, E. H., "Rational Expectations and the Impact of Money upon Stock Prices," Tanner, E. J., and J. M. Trapani, "Can the Quantity Theory Be Used to Predict Stock Pricesor Is the Stock Market Efficient?" Southern Economic Journal 44, 1977, pp 261270. Tobin, J., "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit, and Banking, 1, 1969, PP 15-20. White, H., "A heteroskedasticity-consistent Covariance Matrix Estimator and a Direct Test for heteroskedasticity," Econometrics, 48, pp 817-838. Wu, Y., “Exchange Rtes, Stock Prices, and Money Markets: Evidence from Singapore,” Journal of Asian Economics, 12, 2001, 445-45