TITLE:
The Effect of Money Supply on the Volatility of Korean Stock Market
AUTHORS:
Ki-Hong Choi, Seong-Min Yoon
KEYWORDS:
Stock Volatility, Money Supply, Asymmetry
JOURNAL NAME:
Modern Economy,
Vol.6 No.5,
May
14,
2015
ABSTRACT: We examined the potential relationships between
changes in the money supplies of Korea and the United States and volatility of
the Korean stock market using the GARCH, GJR-GARCH, and EGARCH models. We did
not identify any such relationships, implying that changes in money supply do
not influence the flow of information to the market. However, we found that the
asymmetric effect of bad news on volatility was higher when contemporaneous
changes in Korean and US money supply variables were included in the models.
This indicates that changes in money supply did not affect Korean stock
volatility directly. Finally, the results based on a variance model indicated
that the money supply of the two countries had no effect on the Korean stock
market. This formal study suggests that there is no significant forecasting
power of past changes in money supply. Although stock returns and volatility
are not directly affected by changes in the money supply, the influence of
supply on macroeconomic activity should not be disregarded.