Stock Volatility, Foreign Exchange Rate Volatility and the Global Financial Crisis

This study tries to identify the accurate state and length of the global financial crisis, estimate the risk in the stock and foreign exchange (FX) markets during the financial turmoil, and comprehensively analyze the characteristics of the risk. To this end, financial econometrics models with greater accuracy including the Jump-Diffusion GARCH model considering heteroscedasticity and the Markov Switching ARCH model or the SWARCH (k, q) model were adopted. The Blanchard-Quah Decomposition model with heteroscedasticity has been used for an exact analysis of exchange rate volatility. According to this study, no jump behavior with statistical significance was reported in the Korean stock market during 1/4/2000-6/29/2007 period. In contrast, statistically a significant jump occurred in the market around every seven days from July 2, 2007 to March 31, 2010, the period classified as the global financial crisis. Meanwhile, the study result implies a common heteroscedasticity model may not accurately identify the risk in the Korean stock market, where the probability of regime-switching state is prominent. It also shows the volatility of real shock in Korea's won/dollar FX market has been the highest during the current global financial crisis over the past three decades. Significantly, the relative importance of real shock to the nominal shock has been getting more significant during the financial turmoil compared to IMF period. This study tries to identify the accurate state and length of the global financial crisis, estimate the risk in the stock and foreign exchange (FX) markets during the financial turmoil, and comprehensively analyze the characteristics of the risk. To this end, financial econometrics models with greater accuracy including the Jump-Diffusion GARCH model considering heteroscedasticity and the Markov Switching ARCH model or the SWARCH (k, q) model were adopted. The Blanchard-Quah Decomposition model with heteroscedasticity has been used for an exact analysis of exchange rate volatility. According to this study, no jump behavior with statistical significance was reported in the Korean stock market during 1/4/2000-6/29/2007 period. In contrast, statistically a significant jump occurred in the market around every seven days from July 2, 2007 to March 31, 2010, the period classified as the global financial crisis. Meanwhile, the study result implies a common heteroscedasticity model may not accurately identify the risk in the Korean stock market, w