Volatility integration of the Korean Market with Chile and Peru's Market: A Multivariate GARCH approach

Abstract

The research studies short and long run volatility dynamics between Korea’s stock market (KOSPI), and two countries from the Latin American region with which Korea has a Free Trade Agreement (FTA), Peru and Chile’s Stock Market, BLPGPT and IPSA, respectively. The paper uses three Multivariate Generalized Autoregressive Conditional Heteroscedasticity (MGARCH) models, namely, constant conditional correlation (CCC); the dynamic conditional correlation (DCC); and the Baba, Engle, Kraft and Kroner (BEKK) model to observe the market integration through the volatility spillovers of Korea’s KOSPI and Peru’s BLPGPT, and Chile’s IPSA. However, three more countries from the region were added to compare the results. The thesis has three main scenarios.1) an overall analysis of the 15 years. 2) An Analysis of the FTA effects by sub setting the data in two, Pre and Post FTA. 3) Based on the goods that Korea export/import from Peru and Chile an analysis of the steel and mining industry was applied.