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2023 Dec/07
Determinants of stock returns in Korea - A structural analysis based on capital investment returns Research Papers 23-08 PDF
This paper examines long-term structural drivers in the Korean stock market. The empirical analysis reveals that returns on capital investment effectively account for the long-term movements of stock returns from 1980 to 2021 period and that the average investment return declined after 2000. Theoretically, investment returns consist of two components: the return on the marginal product and the return on installed capital. In the 2000s, while returns on the marginal product saw a modest increase due to cheaper capital prices, the overall investment return fell due to decreases in returns on installed capital. This decline can be attributed to the deterioration of installed capital, influenced by large-scale restructuring following the Asian financial crisis, stagnant labor supply, and low growth potential.

Motivated by the empirical success, this study also presents projections on investment returns based on population scenarios provided by Statistics Korea. The projections for the next 20 years offer the following results. First, investment returns closely track population growth. Second, the cumulative investment return in the high (low) population scenario exceeds (falls short of) the median scenario by approximately 20%p. Third, a 7%p increase in labor supply from the 50-64 age group and a 10%p increase from females lead to substantial increases of 24%p and 36%p in the cumulative investment return, respectively.

Notably, the returns from the scenarios with increased labor supply outperform that with a total 0.3%p increase in total factor productivity (TFP) growth over 20 years. Considering that TFP growth in the 2000s has dropped by half compared to the 1980-1990 average, its improvement seems challenging. Consequently, the findings suggest that improving the labor market is essential to counteract the slowdown in TFP growth, benefiting both the real economy and the stock market in Korea.