This paper empirically analyzes one particular channel through which the increasing connectivity among …nance companies can do harm to the Korean …nancial market: it can worsen the price-discovery process in the equity market. Our analysis is based on the Korean …nancial sector from 1990 to July 2015, including the period of the 1997 Asian crisis and the 2007-8 U.S. Financial crisis. By ‘densely connected’, we speci…cally refer to the case in which a node experiences strong lagged return spillover from and/or to itself. With data spanning the entire …nancial sector, we show that the more densely connected a particular …nancial institution is, the more volatile stock price and the less accurate stock price quality becomes. Hence we establish connectedness as an important determinant of stock price discovery. Our work is expected to help regulators and policy makers understand the full implication of introducing new policies which can make …nancial institutions more connected.
KEY WORDS: …nancial institution, connectedness, volatility, price discovery, Korean …nancial sector
