Interpreting some empirical facts of business cycles and stock returns in Korea 1

Economists have long been interested in the relationship between real economic activity and the financial markets. Nevertheless, this long-held line of inquiry has not yielded any definitive answers to conventional questions such as ‘Was the stock market crash responsible for the latest recession?’ Numerous studies attempted to find the link between the two sides of the economy empirically or theoretically. Pioneered by Fisher (1907), many authors have been interested in the link between the financial market variables and real economic activity. ² Another line of research that has received as much attention in the 1980s and 1990s was to find the stylized facts of an economy over business cycles and growth, in the spirit of Kaldor (1957). Since the seminal contribution by Hodrick and Prescott (1997), a number of studies attempted to empirically document these stylized facts, mostly for the US and European economies. For the East Asian economies, Kim and Choi (1997) document stylized features for Korea and Kim (1999) presents some evidence on the empirical properties of South East Asian business cycles.