Price Discovery and Transmission of Information among Korea Stock Market and Green Finance Markets
Authors:   Asia-Europe Perspective Association, Hahn Deok-Hee 
Published: June 2018

Many countries focus on the Green growth as a new paradigm to cope with global financial risk, which is embraced now in most countries around the world. Although there is considerable debate as to what truly Green growth, it entails both the prevention of environmental pollution and the attainment of sustainable growth. The Green growth is founded upon environmental factors that drive a new force of economic progress without deteriorating nature. Thus, the conservation of the environment under the new growth paradigm can be compatible with economic growth.
Green finance is essential to achieving sustainable growth efficiently and effectively. Since the financial system for Green growth is at the early stage of implementation in Korea, the application of strategies for Green finance should be preceded by proper initiation and protection from the government.
I empirically examine the information transmission between the KOSPI market and the Green Finance markets, namely SRI (Social Responsible Investment), SRI ECO, and Green, for the period from January 4, 2010 to February 14, 2012 using daily data. Specifically, the study addresses three issues: (1) the Green finance markets has predictive power for the stock market or vise versa; (2) if a variable have predictive power, how long does the variable in response to the various shocks; (3) how big does the proportion of the movements in a sequence due to its own shocks impacts to the other variable.
The analysis employs the vector-autoregression, Granger causality, impulse response function and variance decomposition using daily returns on both the stock market index and Green Finance stock market indices. Tools employed by VAR analysis-Granger causality, impulse response function and variance decomposition-can be helpful in understanding the interrelationships among economic variables.
Granger causality actually measures whether current and past values help to forecast future values. So, a variable y is said to be Granger-caused by other variable x if x helps in the prediction of y. A shock to the i-th variable not only directly affects the i-th variable but is also transmitted to all of the other endogenous variables through the dynamic (lag) structure of the VAR. An impulse response function traces the effect of a one-time shock to one of the innovations on current and future values of the endogenous variables.
While impulse response functions trace the effects of a shock to one endogenous variable on to the other variables in the VAR, variance decomposition separates the variation in an endogenous variable into the component shocks to the VAR. Thus, the variance decomposition provides information about the relative importance of each random innovation in affecting the variables in the VAR. So, the variance decomposition tells us the proportion of the movements in a sequence due to its own shocks versus shocks to the other variable.
The findings in this paper indicate that the KOSPI return has predictive power for both SRI return and SRI ECO return from Granger causality test. And SRI ECO return has predictive power for the KOSPI return. Also, a bilateral causality between SRI return and SRI ECO return exists. But Green return don't has predictive power for the KOSPI return, SRI return, and SRI ECO return and vice versa.
The dynamic impulse reponses show that it takes two days to reflect information shocks to SRI market from the KOSPI market. Also, it takes two day to reflect information shocks to SRI ECO market from the KOSPI market and to SRI ECO market from SRI market.
The results of variance decomposition show that the Green finance markets are affected by the KOSPI markets. The overall results suggest that the dominant influence runs from the KOSPI market to Green finance markets; the KOSPI leads both SRI and SRI ECO. While both SRI market and SRI ECO market are affected by the KOSPI market, Green market are not affected by the KOSPI market and vise versa.