Stock and bond returns correlation in Korea: Local versus global risk during crisis periods

This paper examines stock and bond returns correlation in Korea as an emerging market case study. The study covers the Asian financial crisis of 1997–1999 and the global financial crisis and European fiscal crisis of 2007–2012, plus non-crisis years that extend the sample period to 2005–2017. The sign of stock and bond returns correlation is shown to depend on the origin of risk triggering the crisis. In the local-risk driven crisis of 1997–1999, a flight to quality occurred across countries, causing stock and bond returns in Korea to decrease together. However, in the global-risk driven crises of 2007–2012, the flight to quality occurred across asset classes domestically, causing stock returns to decrease but bond returns to increase. Further, stock and bond returns correlation is found to relate systematically to changes in key macroeconomic variables, in particular, stock market volatility and a business leading indicator.