Oil Prices and Stock Market Activity: The Case of Korea

This paper examines how oil price affect stock market after taking place oil shocks by examining the determinants of the relationship among macro variables influencing stock market. We focus on volatility of financial market, as well as change of correlation between major macroeconomics variables and financial market. According to changes in international oil supply and demand, the movement of international capital markets is very keen to react. Thus, the reason that fluctuations of the oil price strongly affect stock prices is because domestic and foreign industries have high dependence on oil price. In this paper, we use the dynamic conditional correlations (DCC) model to analyze the dynamic structure of conditional correlations between oil prices and stock prices. Results from BGARGH-DCC and quantile regression approaches confirm that oil prices and oil price returns both play important roles in affecting stock market activity. Our results suggest that oil price returns of each industrial stock variable have same directions which are right-upward.