Transmission of central bank communication to emerging economies: Evidence from the Korean stock market

Abstract

This study analyzes the impact of US central bank communication on financial markets in emerging economies. We find that informal communication from the Fed positively influences the Korean stock market at a greater magnitude than the US stock market. The results show that the Korean stock market experienced higher excess return when Korea's monetary policy decisions are uncertain, suggesting that central bank communication in central countries could transmit to emerging economics through their monetary policy decisions and uncertainty. In addition, various portfolios and individual equities have a positive market risk-return tradeoff in the presence of Fed communication only.