Housing Collateral, Liquidity Constraints, and Funding Liquidity in Korea
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This paper studies the role of the liquidity constraint that is associated with limited borrowing capacity of indebted households in determining the fluctuations in the Korean Stock Index, KOSPI. In the paper, the vector auto-regression results present statistical evidences that Korean households' credit cycle is tied to the housing price index, and to the cyclical components of the Korean stock market. Because a substantial part of credit is constrained to the value of their home, when the borrowing rates increase in an economy, Korean households tend to borrow less, and lower the demand in housing relative to the total consumption expenditure. The collateral value of housing is particularly important to determine the liquidity into a stock market according to the impulse response function with the high housing collateral ratio. The ratio suggests evidence that tuning the permanent income to correct its collateral value deflates the overshooting Korean credit cycle, while delivering more liquidity in a stock market.
Abstract
This paper studies the role of the liquidity constraint that is associated with limited borrowing capacity of indebted households in determining the fluctuations in the Korean Stock Index, KOSPI. In the paper, the vector auto-regression results present statistical evidences that Korean households' credit cycle is tied to the housing price index, and to the cyclical components of the Korean stock market. Because a substantial part of credit is constrained to the value of their home, when the borrowing rates increase in an economy, Korean households tend to borrow less, and lower the demand in housing relative to the total consumption expenditure. The collateral value of housing is particularly important to determine the liquidity into a stock market according to the impulse response function with the high housing collateral ratio. The ratio suggests evidence that tuning the permanent income to correct its collateral value deflates the overshooting Korean credit cycle, while delivering more liquidity in a stock market.
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