Foreign Exchange Market Stress and Stock Market Herding: Evidence from South Korea

This study investigate show foreign exchange market stress affects herding behavior in the Korean stock market from 2007 to 2022. Using the Financial Stress Index for Foreign Exchange Markets (FSIFX) and cross-sectional absolute deviation (CSAD) methodology, we find that herding behavior occurs during periods of foreign exchange stress particularly when stress escalates rather than subsides. No herding emerges during stable periods or across the full sample. However, significant herding occurs when foreign exchange market stress exceeds 1.5 standard deviations above its mean. Results indicate that external financial pressure systematically influences domestic investor behavior, highlighting the need for coordinated monitoring of foreign exchange and securities markets in emerging economies.