This thesis examines the extent to which the conditional volatility of stock market returns are related to the conditional volatility of financial and business cycle variables. It employs a low frequency monthly dataset for Korea including stock market returns, interest rate, exchange rate, the money supply, industrial production and oil price over the period from January 1987 to August 2003. Each variable’s conditional volatility is estimated using the ARCH, GARCH and IGARCH models.
This study employs the generalized least squares(GLS) estimation procedure together with the Hendry’s general-to-simple modeling strategy to determine the relationship between stock market volatility and macroeconomic variables’ volatilities and to obtain efficient estimators.
Among the most important determinants of the conditional volatility of the Korean stock market are found to be the conditional volatilities of exchange rate and interest rate. In addition, the conditional volatilities of industrial production and the oil price are also associated with stock market volatility. However, the conditional volatility of money supply is not associated with stock market volatility.
