Analysis of the Impact of Economic Policy Uncertainty on Korea’s Financial Stress

Korea is a small open economy and is significantly affected by macroeconomic shocks in major countries. Previous studies have shown that financial markets such as the stock market and foreign exchange market are sensitive to financial instability and economic policy uncertainty in major developed countries. However, these studies have typically focused on individual financial markets and have not comprehensively analyzed how financial stress in Korea is affected by uncertainty in major developed countries from the perspective of financial stability. In this study, we use the spillover index proposed by Diebold and Yilmaz(2009, 2012) to analyze the impact of economic policy uncertainty (EPU) in the United States, Europe, Japan, and Korea on Korea's financial stress index (FSI). The study examines the influence of economic policy uncertainty in these major developed countries on Korea's financial stress over time. Furthermore, the findings indicate that during periods of heightened uncertainty, major developed countries have a relatively large impact on Korea's financial stress.