Transmission of the global financial crisis to Korea

We argue that Korea's recent financial distresses reflect contagion of the crisis, beyond normal interdependence between the Korean financial market and other regional financial markets. The tests based on the correlation coefficients estimated from the DCC-GARCH and STC-GARCH models lend support to our argument. The contagion occurs mainly during Leman's bankruptcy and the financial market instability in February 2009. The estimation results suggest that exogenous shocks are transmitted to the domestic financial market and they are further facilitated by the structural weakness of domestic financial system. The nature of contagion of the crisis implies that macroeconomic policies that can stabilize the entire financial market may be preferable to microeconomic policies aimed at addressing selected financial institutions’ difficulties. The Korean government has implemented strong macroeconomic policies to address the financial distresses, and the present results suggest that they have thus far been successful.