Abstract
Abstract This paper employs dynamic conditional correlation (DCC) model to examine time-varying comovementin the Korean stock market with a focus on the financial industry. Analyzing the daily returns of KOSPI 200eight sector indices from January 2008 to December 2013, we find that stock market correlations significantlyincreased during the GFC period. The Financial Sector had the highest correlation between the Constructions-Machinery Sector; however, the Consumer Discretionary and Consumer Staples sectors indicated a relativelylower correlation between the Financial Sector. In terms of model fitting, the DCC with t distribution model con-cludes as the best among the four alternatives based on BIC, and the estimated shape parameter of t distributionis less than 10, implicating a strong tail dependence between the sectors. We report little asymmetric effect incorrelation dynamics between sectors; however, we find strong asymmetric effect in volatility dynamics for eachsector return.Keywords: Dynamic conditional correlation model, asymmetry, tail dependence, financial crisis,KOSPI 200 sector index.
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