Trade Agreements and Stock Markets
- Ahn Soyoung
- 사회과학대학 경제학부
- Issue Date
- 서울대학교 대학원
- Trade Agreements; Stock Market Comovements; DCC-GARCH model; Determinants of DCC; Trade Intensity; KORUS FTA; Stock Market Reactions; Event Study; Abnormal Returns; Efficiency Market Hypothesis; Comparative Advantage
- 학위논문 (박사)-- 서울대학교 대학원 : 경제학부 경제학전공, 2016. 8. 양동휴.
- Conventionally, trade agreement is an important phenomenon in the international trade environment. Existing studies on the effect of trade agreement are usually analyzed only using trade-related theories and data. However, international trade and financial market are closely related to each other, so the impact on the real market caused by trade agreement brings the long-term and short-term effect on the financial market where the countries are involved. Therefore, in Chapters 2 and 3 of this paper, these issues are addressed in more detail under the subject of 『Trade Agreements and Stock Markets』. Chapter 2 focuses on relatively long-term and ex-post evaluation at national level, while Chapter 3 focuses on very short-term and ex-ante expectation at industries and individual firms level.
In Chapter 2, I examine the comovements of stock markets between United States and eleven partner countries of FTAs. Over the ten FTAs signed by United States, I measure the degree of integration using a DCC GARCH model. As a results, Korea, Mexico, Chile, Colombia, Peru and Singapore show increasing DCC patterns after trade agreements with US. On the other hand, there is little difference in DCCs of Canada, Australia, Bahrain, Jordan and Morocco before and after trade agreements. According to the gravity model, FTAs increase the Bilateral Trade Intensity, Trade Intensity of Final goods and Trade Intensity of Intermediate goods respectively. And the increase of Bilateral Trade Intensity between US and partner country has a positive influence on their stock market correlations. The main interesting finding is the interaction term of FTA Dummy and Bilateral Trade Intensity has a positive significant coefficient. This result represents the mechanism only if the trade intensity between two countries is high or increasing, the signing of FTA increases the stock market comovements. Futhermore, the significance of Trade Intensity variable is disappeared when the interaction term is introduced, which implies the impact of trade intensity on stock market comovements is more substantial after FTA. Importantly, the increase of intermediate goods trade intensity after FTA is a key factor of the further increasing in the stock market comovements. Other macroeconomic variables such as Asymmetry of Real Interest Rate, Output Growth Rate and Market Capitalization have negative effects on the stock market comovements as expected. This chapter enables us to understand not only how stock markets are integrated but also why stock markets are integrated with regard to trade agreements.
In Chapter 3, I examine the reactions of stock markets when the trade agreement related news arrives. I analyze the Korea-United States Free Trade Agreement (KORUS FTA) because this agreement is commercially significant and well suited. Using an event study methodology, I investigate that the FTA news has a significant impact on the stock market prices by industries in Korea and US. This is meaningful in that it is the first attempt to target the KORUS FTA. In conclusion, the investors perception toward the effect of KORUS FTA on Korean industries changed from negative to positive as negotiations proceed. And the stock markets generally have realized positive excess returns on the news which is favorable to the firms' future profits, and vice versa. Events which satisfy the unexpected condition have more abnormal returns significantly. Considering this analysis targets the same day when the news was announced, the result fairly meets the efficiency market hypothesis. Meanwhile, stock markets have a tendency to react to the political or sentimental factors as well as economic factors. In the United States, KORUS FTA related news leads to the positive significant abnormal returns to the US firms from the early stage of the negotiations. Also, investors in US stock market are likely to respond to the FTA news more consistently than those in Korea stock market. Economically important and large industries such as 'Auto & Parts', 'Chemicals' and 'Electrical Equipment' industries react sensitively and have more significant abnormal returns in Korea when FTA news arrives. And winners and losers differ by industries in US and Korea, which implies that the industrial structures of the two countries are quite different. We identify the firms that current export ratio is low or zero show the similar stock price movements with exporting firms to the FTA news by industry. At last, Korea has a comparative advantage in the production of labor intensive goods. In that case, trade liberalization caused by KORUS FTA forces Korea firms to adjust from intensive use of capital to that of labor in the future.