Analysis of the Relationship between Stock Index, Exchange Rate and Oil Price of Major Countries in the Face of Trade Conflict
Authors:   Asia-Europe Perspective Association, Kim Youn-Ki , Kwon Sun-Hee 
Published: December 2024

The ‘U.S.-China trade conflict’, caused by the confrontation between criticism of China’s ‘unfair trade, intellectual property rights infringement’ against Trump’s ‘America Firsterism’ and China’s ‘The Manufacturing of China 2025’ focused on revitalizing its manufacturing, caused Korean economy to contract with its indirect trade conflict. At the same time, the ‘South Korea-Japan trade conflict’, caused by Japan’s ‘Future Investment Strategy 2018’ focused on the improvement of national income and international competitiveness through the expansion of Japanese IT industry and the claim for compensation against the Japanese company ‘Shinil Steel Co’ from victims drafted into the military by force during the Japanese colonial era leaded to economic retaliation of Japan. This direct trade conflict provided challenge to the economy of South Korea. The multilateral conflict has revealed its effect in many ways. Therefore, it would be very meaningful to analyze one of the effects of ‘indirect and direct conflicts’ by analyzing changes in the KOSPI, a barometer representing South Korean economy.
The study uses data from March 31, 2017 to October 24, 2019, in order to confirm the effect of the conflict by analyzing the relationship between the KOSPI and Stock Price Index of each country, exchange rate, international oil prices under the U.S-China & South Korea-Japan trade conflicts. The study also adopted a VAR model to overcome the rigidity of time. All parallax variables in the model were set as independent variables, and the actual economy was analyzed through time series information observed through the model. This could provide basic data for deriving our matching task and examine the ripple path of conflict by analyzing variables.
Based on the VAR model, the study measured the effect of each conflict on the economy of South Korea by analyzing the relationship of variables through the Grandeur causal relationship and impulse response. The results are as follows. In indirect conflicts the KOSPI shows only a temporary response to the impact of the S&P500/SSEC, but the impact of international oil prices and exchange rates has the effect of the KOSPI falling. And the impact of exchange rates last for a long time. On the other hand, in direct conflicts, the KOSPI was increased by the impact of the NIKKEI and its effect lasted for a long time. Also the impact of international oil prices and foreign exchange rates, same for indirect conflict, has the effect of falling KOSPI, and the impact of exchange rates lasts for a long time. The results indicate that the Korean stock market showed more sensitive reaction to the direct trade conflict with Japan.
The implications of the study are as follows. The effect of the conflict is conveyed through the movement of exchange rates, so the government have to prepare for the damage of the conflict by managing possession of foreign exchange. Also, in the process of reaching an agreement between South Korea and Japan, South Korean companies were able to reduce the dependence on Japanese raw materials. However, the study is focused on the overall volume of South Korea, so there is a limitation that the conflict is not able to consider the changes of local unit affeted by the conflict.