The U.S. Subprime Mortgage Market Turmoil and its Effects on the Korean Capital Markets

We studied the relationships between Korea Treasury Bond (Bond) futures, the KOSPI index, and KOSPI200 index futures to determine the interactions and effects among the securities in the periods before and after May 2007 by using daily securities data from January 2, 2007 to October 5, 2007 obtained from KRX. Because non- stationary and co-integration were indicated from a unit root test and a co-integration test, we adopt a vector error correction model to determine the relations between these indices and to obtain forecast error variance decomposition. This study showed the following results. The negative relations between Bond and KOSPI before May 16, 2007 strengthened after the crisis, which was also true for the relations between the Bond and KOSPI200 index futures. The variance decomposition of KOSPI index and KOSPI200 index futures revealed that after the crisis, the explanatory powers of KOSPI index decreased, whereas those of KOSPI200 index futures increased.