Corporate Vulnerability Index as a Fear Gauge? Exploring the Contagion Effect between U.S. and Korean Markets

Abstract

The nature and extent of financial contagion across international borders is an important yet unsettled subject. In this article, Kim, Ryu, and Seo explore transmission of credit risk from the U.S. stock market to Korean markets for stock, equity futures, and volatility. U.S. credit risk is measured using a new index, the CVI computed by the Risk Management Institute at the National University of Singapore, which is designed to capture a firm’s risk of default within the next year. One key question is whether the linkage between markets is a direct one from trading, or an indirect one operating through the transfer of information. The article shows that a shock to the CVI for S&P 500 Index stocks has a highly significant influence on the KOSPI 200, KOSPI 200 futures, and the VKOSPI volatility index. Both a direct impact largely from trading by foreign investors and also an informational impact from the release of the CVI are independently significant.