Analysis of Changes in the Soundness of Korean Stocks after Capital Market Opening: Focusing on Role and Identification of Long-term Equilibrium Variables

Abstract

This study examines and evaluates changes in the soundness of Korean stock prices by classifying the financial and global financial crises after the 1990s, when the capital market was first opened. The criteria for judging soundness include whether stock prices are determined by long-term equilibrium variables, whether there is a trend among non-long-term equilibrium variables, and whether long-term equilibrium variables of overseas stocks are identified during the Korean stock price determination process. Further, a co-integration test is performed using the VAR model which comprises the stock prices from Korea and the United States, and their long-term economic equilibrium variables. Furthermore, a transformation error correction model with a VAR type consisting of differences and cointegration errors in Korean stock prices is derived. Accordingly, the trend of long-term equilibrium variables is estimated using the Beveridge-Nelson decomposition of Korean stock prices. Furthermore, a test for its presence is performed. According to the empirical analysis conducted using monthly Korean data; the influence of the long-term equilibrium variable trend in the Korean economy tends to increase the stock prices following a financial crisis.