Energy price shocks and stock market volatility in an energy-importing country

Abstract

We examine volatility dynamics in the Korean market using heterogeneous autoregressive models with exogenous covariates. The COVID-19 pandemic and the Russia–Ukraine War have caused substantial fluctuations in energy prices. We assess how these energy shocks affect stock market-implied volatility in Korea, a representative energy-importing country. During the pre-pandemic period, domestic and U.S. market factors affect Korea's volatility dynamics, whereas crude oil and natural gas futures prices have little explanatory power for these dynamics. In contrast, during the pandemic (war), oil (natural gas) futures prices become the key explanatory variable, and other market factors lose their explanatory power.