Dynamic Relationships between Uncertainty and the Stock and Housing Markets in Korea

In this paper, we explore the dynamic interrelationship among Economic Policy Uncertainty (EPU) of the US and China, stock, and housing market in Korea. We collect the data to use the Vector Error Correction Model (VECM) which are the EPU indexes, the stock indexes, and housing price indexes. Our main dataset includes EPU indexes of the US and China developed by Baker et al. (2016). And we use the stock indexes such as non-metal, chemical, transportation apparatus, machinery, electric·electronics industry sectors, and KOSPI. Also we use Housing Purchase Price Index (HPPI), and Housing Lease Price Index (HLPI), Consumer Price Index (CPI) in Korea. In our study, the data period to estimate the empirical analysis is January 1995 to December 2017. As a empirical analysis, the methodology of this study is used for the Vector Error Correction Model (VECM). In the results of a impulse response function after VECM analysis, we find out impact of the US EPU index has initially a negative response on the stock indexes of the non-metal, transportation apparatus industry sectors, and KOSPI. Also, the HPPI and HLPI referring the housing market including the CPI is negatively affected by the impact of EPU indexes from the beginning. However the shock of EPU index in China has given negative responses to all variables in Korea from the early stage. We reveal EPU in the US and China affect the stock and housing market in Korea. First, this study documents EPU indexes of the US and China have the negative relationships with stock indexes and housing price indexes in Korea via VECM analysis. Second, this study has an evidence for the dynamic relationship between EPU of the US and China and the stock and housing market in Korea.