The Impact Of Covid-19 On Volatility Connectedness In The Korean Stock Markets: Focusing On Firm Size

Abstract

This study aims to analyze the impact of COVID-19 outbreak on the connectivity in Korean stock Markets. To achieve this, the connectivity of KOSPI and KOSDAQ markets' six size indices were analyzed using volatility spillover index (Diebold and Yilmaz, 2012). The major empirical results using the volatility spillover index are as follows. First, it was found that COVID-19 outbreak has increased the linkage between stock markets, as well as the amount of information between the markets, resulting in synchronization between the index. Additionally, the volatility spillover index provides information on the strength and direction of interdependence by measuring the directional spillovers and net spillovers. Second, COVID-19 outbreak has increased the volatility spillover index in KOSDAQ and KOSPI markets, with mid-cap companies in KOSDAQ market and the large-cap companies in KOSPI market showing the most significant increase in spillover effects due to higher levels of TO spillover. Third, the net spillover effects of small-sized companies in both markets have decreased. Rolling sample analysis using a 52-week window size confirms these results and shows that the volatility spillover index remained high throughout 2020 and early 2021, indicating that COVID-19 outbreak increased the effect of volatility spillover between markets. Finally, after analyzing the 52-week sample moving average, it was found that KOSPI small-cap, KOSDAQ mid-cap, and KOSDAQ small-cap index had a positive (+) net spillover effect, while KOSPI and KOSDAQ the large-cap indices had a negative (-) net spillover effect. The result is consistent regardless of time, except for KOSPI mid-cap index. Net spillover effect, which shows significant changes in KOSPI market during and after the COVID-19 period.