An analysis of the interrelationship between the domestic and foreign stock market variations over the depressed market period

This study investigates the short and long-run dynamic relationships between the domestic and US stock markets for the period of declining stock prices. It is well known that the domestic stock market variations are largely caused by the US stock market movements. Multivariate causality test is utilized to examine the lead–lag relationships among four stock prices of KOSPI and KOSDAQ in the domestic part and DOWJONES and NASDAQ in the US part. When the stock prices tend to decrease in the long run, it is found that both KOSPI and KOSDAQ have closer relations with NASDAQ than DOWJONES. When both of domestic stock markets are severely fluctuating, bidirectional causal relationships appear to exist between NASDAQ and each of KOSPI and KOSDAQ. On the other hand, when the domestic stock markets are relatively stable, undirectional causality is found to exist between NASDAQ and each of KOSPI and KOSDAQ, which is explicitly validated by the analysis of variance decomposition.