Can Granular Hypothesis Be Applied in Korean Economy?

Abstract

This paper tests whether idiosyncratic shock to large firms can explain GDP fluctuation in Korea using stock return as well as fundamental variables. The results show that large firms idiosyncratic stock calculated by fundamental variables fails to account for GDP growth when I control for the business cycle and several crisis dummies. In contrast, idiosyncratic shock to large firms derived by the stock return shows robust effect on GDP growth rate. However, the effect does not propagate through the business cycle. This idea might be useful to account for the fluctuation of GDP using stock market information and propose a new perspective for idiosyncratic shock.