Interrelationships and volatility of the financial asset prices under capital flows: The case of Korea

This study aims to clarify how the interrelationships among financial asset prices have changed after the Korean currency crisis in 1997. The empirical analysis shows that volatility of the financial asset prices increases substantially in the case of stock price shock and exchange rate shock. Strong effects of a stock price shock on the won/dollar exchange rate and the call rate implies that stabilization of the stock market is important for sustaining financial stability. Therefore, these results support imperfect substitutability between stocks and bonds in the framework of an asset market approach to exchange rate determination in Korea.