“Market coupling: an empirical study of the Sino-Korean game industry”

This study aims to examine the relationship between the Korean and Chinese game industries, and more broadly, the Chinese stock market. Chinese firms are the most important partners and investors in the Korean game industry, which has emerged as a significant component of a thriving Korean economy. The paper examines the impact of growth in the Chinese game industry on the Korean market and the correlation and cointegration between the stock returns of nineteen Korean game companies, the Chinese stock market, and Chinese game companies. A portfolio constructed from Korean game companies listed on the KOSPI and KOSDAQ is analyzed. Variation in the Shanghai Composite Index is shown to significantly influence the performance of Korean game companies. Further, the Korean game industry is sensitive to changes in the stock price of leading Chinese game publishers. The Korean game industry returns more closely mirror the returns of the Chinese stock markets rather than the Korean markets, evidence of the influence of China. As growth and returns in the Korean game industry are closely related to the performance of the Chinese market, future performance is subject to political and economic changes in China.


INTRODUCTION
After the 1997 Asian financial crisis, the source of Korean economic growth shifted from labor and capital intensive manufacturing businesses to information-technology (IT) value-added businesses.South Korea experienced an IT venture boom in the early 2000s, part of the global dot-com bubble.Korean IT infrastructure is well developed, including fast, inexpensive internet connections.In this environment, the Korean online game industry has emerged as a meaningful part of the economic transformation.In the last two decades, world game markets substantially grew along with the evolution in PCs, internet, and smartphones.The Korean game industry has played an important role in contributing to GDP growth.Additionally, Chinese firms represent the biggest partners of the Korean game industry and the largest investors.Given this close relationship, possibly, if a systemic risk event occurs in the Korean game industry,it could possibly impact the Chinese game market and vice versa.
Moreover, the Korean game industry is highly associated with the Chinese game industry, not only due to geographic proximity but also because of similar game environments.Unlike the U.S. and European game industries, which began with PC and console games (e.g., xBox and PlayStation), the Korean and Chinese game industries have experienced considerable development through mobile games.Both Chinese and Korean game industries are mobile game-oriented markets, while the U.S. and Europe can be viewed as console game-oriented markets.Similarity in popularity of games and method of delivery exist between the Korean game industry and the Chinese market, while greater differences exist when compared to Western countries 1 .
Given the consistencies between the two game industries, we examine whether the stock prices of Korean game companies are affected by changes in the Chinese stock market performance.To investigate whether Korean game companies' stocks are coupled with the Chinese stock market, stochastic trends of Korean game stocks and the Chinese market are examined using a cointegration test following Granger and Newbold (1974) and Engle and Granger (1987).
This study aims to clarify the inter-relation of changes in stock prices in the Sino-Korean game industry by defining the co-movement between the Chinese and Korean game industries.To identify the relationship between the Korean and Chinese game industries, an analysis of returns for an equally weighted portfolio of nineteen Korean game companies is utilized.Portfolio stocks were selected from game companies listed on KOSPI and KOSDAQ, and comparative analysis included the KOSPI, KOSDAQ, Shanghai, and Shenzhen indexes.It is found that the variation in the Shanghai Composite Index price significantly influences the returns for the Korean game company portfolio.Further, the paper examines the influence of stock price movements of the leading Chinese game companies: 1) Tencent, the Chinese game publisher with the largest market value, and 2) NetEase, the Chinese game publisher with the largest market value in Korea.
The rest of the paper proceeds as follows.Section 1 contains the literature review and formulation of the hypotheses.In section 2, the data and methods are presented, and the results and discussion of findings are presented in section 3. The final section concludes the paper.

1
For the sake of brevity further discussion of the Western vs. Sino-Korean game industries was removed but is available upon request.

2
Report of statistical survey on content industry for 2018.3 For instance, Reuter news published on January 15, 2019 identified over 1.5% of the increase in the KOSPI Index is related to the expectation of economic growth in China.This is an example of China's influence on the Korean capital market (https://www.reuters.com/article/southkorea-markets-close/south-korean-stocks-jump-on-china-stimulus-hopes-idUSZZN2YHL00).

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
The South Korean economy is heavily comprised of service industry companies, which contribute to the largest component of GDP.

Research hypotheses
Given the previously discussed connections between Chinese and Korean game industries, the following research hypotheses are developed and examined: H1: The performance of Korean game stocks will be cointegrated with the Chinese stock market performance.
H2: The stock price performance of Tencent and NetEase, the dominant firms in the Chinese game industry, will be positively correlated with the performance of Korean game companies.
By testing these hypotheses, the study attempts to identify whether the variation in the Chinese stock market and specific game industry market leaders significantly affect the performance of the Korean game industry.

Research data
To examine the research hypotheses, various datasets are used.First, annual financial statements and monthly stock data of game companies listed on the Korean stock market were collected from January 2000 to December 2017.The study includes nineteen game firms with a Korean Standard Industry Classification Code (KSIC)

0, I
and the series are cointegrated.To examine whether the portfolio of Korean game industry stocks is cointegrated with the Chinese stock market, the cointegration test is run using the Engle-Granger method.

Linear relationship
To examine the relationship between the Chinese stock market and the Korean game industry, the following regression model is utilized:

Sharpe ratio
The Sharpe ratio, as suggested by Sharpe (1966Sharpe ( , 1994)), is used to compare Korean and Chinese stock portfolios constructed from stocks in each country's game industries.The Sharpe ratio is specified as follows: where p R is a rate of return of a portfolio, f R is risk-free rate, and p σ is standard deviation of the portfolio's excess return.The larger a portfolio's Sharpe ratio, the greater its risk-adjusted-perforthe equation measures the risk-reward compensation.To further examine this relationship, the level of correlation between the portfolios is calculated, and the results are shown in Table 5. Panel A shows the correlation analysis results for the entire samperiod.The correlation between Chinese and Korean market indices is greater than 20%, while the correlation to the Korean game companies' portfolio is relatively low, less than 9%.Similar results are observed after 2008 in Panel B. Notably, the growth period in Panel C exhibits the correla- tions of 9% and 11% between the Chinese markets and the Korean game companies' portfolio.

Correlation analysis between the Korean game industry and the Chinese stock market
The correlation results are contrary to the pattern identified in Figure 3, possibly because correlation analysis does not fully reflect the economic interrelationship among time series variables.To further examine whether a portfolio of Korean game company stocks is cointegrated with the Chinese stock market performance, the Engle-Granger cointegration test is run.The test results are presented in Table 6.Panel A shows the cointegration values for the Shenzhen market index and the Korean game companies' portfolio and the Shanghai market index and the Korean game companies over the full sample period.Panels B and C display the results for two sub-periods.From the Engle-Granger cointegration test, all the coefficients of γ in Table 6 range from -0.82 to -1.34, and the absolute values of all the t-statistics are greater than 2.00.The null hypothesis of no cointegration is rejected, with 95 percent confidence.

CONCLUSION
This study presents a correlation analysis of the cumulative returns of nineteen Korean game companies listed on the Korean stock market and the Chinese stock markets from January 2000 to December 2017.Additionally, a linear regression analysis, including the Shanghai and Shenzhen composite indices, is presented, utilizing annual financial statement data and monthly stock data.The analysis results confirm that Korean game companies experienced a more rapid increase in returns than the general Korean economy over the examined period, proxied by the KOSPI and KOSDAQ composite indices.The Korean game company results more closely resemble the returns of the Chinese stock market.Growth in the Korean game market is closely related to Chinese economic performance, confirming research hypothesis 1. Contrary to expectations, the stock returns of the dominant Chinese game companies, Tencent and NetEase, are negligible indicators of the ascending-descending fluctuation in the returns of the Korean game industry, resulting in a rejection of research hypothesis 2. If the relationships and interconnectedness between the Korean and Chinese game industries persist, Tencent and NetEase will have the potential to be powerful influencers.Korean game companies would benefit from following the strategies of these companies and attempt to forecast how this will impact the current and future circumstances of the Sino-Korean game market.The impact of China on the Korean game industry is likely to increase if political actions are taken to increase content censorship in China.Actions such as establishing a department for overseas intellectual property protection by the Chinese government would limit the dispersion of Korean content in China.As the economic and political factors evolve, future examination of the correlation between the stock returns of Korean game companies and the Chinese economy will be necessary.Additionally, the examination of the impact of unlisted companies on the Korean game industry may play an important role in understanding the performance.
The Korean and Chinese game industries have developed close ties, while the U.S. and European markets continue to exhibit cultural and technical characteristics that make marketing Korean games challenging.Korean game companies are entwined with the Chinese game market, given the large size and importance of the market.Strong government intervention in China's game market could adversely impact the Korean game industry, and performance may be affected by China's economic and political issues.In the short run, there is unlikely to be any meaningful change, but Korean game companies are conscious of the situation and should work to reduce their reliance on China.The results have implications for other Korean industries, and possibly similarly developing industries in other Asian countries.Understanding how the performance of the Chinese markets could potentially impact a firm's performance may influence the strategies a firm chooses.Finally, investors and potential investors in Korean game firms must consider the economic and political expectations for China when estimating the expected returns.

Figure 3 .
Figure 3. Cumulative returns for KOSPI, KOSDAQ, Shanghai index, Shenzhen index, and Korean game companies' portfolio Market size of the Chinese game industry (unit: hundred million Yuan) (1)slanalp et al., 2016)ships, motivates the examination of the correlation between the game firms in the stock markets of both countries(Arslanalp et al., 2016).http://dx.doi.org/10.21511/imfi.17(1).2020.251.1.Korean and Chinese game industriesThe Korea Creative Content Agency (2018) presents a summary of the growth in the global game industry.The global game industry experienced a higher growth rate than the average global economic growth rate, while its absolute economic scale has reached over 1% of the global economy.The estimated market size for all global mobile games in 2017 corresponds to 74 trillion Won (equivalent to US$ 61.7 billion), while the estimated market size for Chinese games is 28 trillion Won (equivalent to US$ 23.3 billion) or 38% of total revenue.Chinese game publishers control a larger market share than the combined share controlled by Japan and the U.S. The Korea International Trade Association marketing report (2018) 4 presents the size of the Chinese game market as of 2014, 111.4 billion Yuan (approx.12.33 trillion Won).The Chinese gaming industry has shown steep growth, with growth in 4 Utilizing the Chinese game industry analysis results of the Game Publishing Committee of China, China New Game Research and International Data Corporation.market size from 10 trillion Won (US$ 8.3 billion) in 2014 to over 20 trillion Won (US$ 16.7 billion) in 2017.Although, growth rates have gradually declined since 2014, reaching a steady rate of 17.7% in 2016 and remaining relatively stable thereafter, as shown in Figure 1.The Chinese game market is estimated at 235.1 billion Yuan in 2018.In 2012, online games accounted for 74.9% of the entire Chinese game market, but, in the succeeding years, this dominance has declined, with a market share of 50% as of 2016.The decline in the market share of online games may be attributed to the growing popularity of mobile games, as shown in Figure 2. From 2015 to 2016, the mobile game market grew by 59% and is now established as a key component of the Chinese game industry.In 2017, the mobile game market size was 122.1 billion Yuan, and increased to 145 billion Yuan in 2018.It is projected that the mobile game market will represent approximately 62% of the online game market (Korea Creative Contents Agency, 2018).Figure 1. Figure 2. Market size of the Chinese mobile game industry (unit: hundred million Yuan) In 2017, ten of the top fifteen companies in the Chinese game market, in terms of sales, were publicly listed companies.Sales for the ten 5 The Chinese government imposed a ban on publishing Korean games as a measure of economic retaliation after the deployment of THAAD in Korea (https://www.gamesindustry.biz/articles/2017-03-09-china-will-ban-new-korean-games-from-being-published-report).tions on Korean game publishing in China, several Korean games have experienced success in the Chinese market.In particular, Dungeon & Fighter and Cross Fire, both Korean developed games, have seen continued success and rank among the most popular PC games in China.Table 2 lists the Nielsen Company's survey, from February 2018, of the most popular PC games in China.Games listed in bold were either developed in Korea or with intellectual property originating from Korean game companies.

Table 1 .
Chinese game companies ranked by total sales

Table 2 .
(Kim, 2016)f PC games in ChinaTencent has sought to participate in the success of the Korean game industry by investing in Korean game companies.The annual financial statements of Tencent show that the company earns more than 1 trillion Won a year from Cross Fire, a product by Korean game company Smile Gate.Dungeon & Fighter, a product of Korean game company Neople, represents a significant source of sales for Tencent.Lee (2018)provides details regarding the Chinese mobile game market.Lee (2018)identifies that Tencent became the second-largest stockholder in Bluehole, a Korean game developer, with an investment of more than 600 billion Won.Tencent had begun distributing Battle Ground, developed by Bluehole, towards the end of 2017.They have garnered success in both PC and mobile versions of the game.Tencent has a history of investment in the Korean game industry with the establishment of Tencent Korea in 2011.In 2014, they partnered with Daum Communications to create Kakao, a Korean internet company, with an investment of 72 billion Won.Finally, Tencent approximately 500 million dollars in Netmarble, Korea's largest mobile game company.League of Legend, a product of Riot Games, which is wholly owned by Tencent, has been excelling in the Korean game market with a focus on internet café distribution since late 2013.Similarly, NetEase has had an important influence on the Korean game market.They have pursued a strategy of consistently publishing Korean games in China through NetEase Korea.They distribute Herowarz, developed by the Korean game company A-Storm, to Chinese players(Kim, 2016).Ji (2018) explains that Tencent holds share values of 3.6 trillion Won in seven Korean game companies.Given the high degree of associations between the Chinese and Korean game markets, we expect that Korean game com-panies will be influenced by the political and economic conditions of China. (1)p://dx.doi.org/10.21511/imfi.17(1).2020.25

Table 3 .
2018 Rank of mobile games in China

Table 4
(1)sents the descriptive statistics for stock markets and Korean game companies, including http://dx.doi.org/10.21511/imfi.17(1).2020.25Thegains in the Korean game companies' portfolio mirror that of the Chinese stock market indices.The visual evidence indicates a high probability of correlation between the Korean game market growth and the economic recovery in China.

Table 6 .
Engle-Granger cointegration tests (Jan.2000 -Dec.2017) Analysis results for linear regression of ROE on the Shenzhen composite index using full sample, and two subsample periods are not presented.Similar results were observed from an auxiliary test and are available upon request.

Table 7 .
Regressions of ROE on annual SSE composite index return

Table 8 .
Monthly performance of NetEase and Tencent

Full sample period (Jan. 2000 -Dec. 2017)
Though the slopes of the cumulative stock returns differ across the markets, the trend of the two markets is similar, with greater returns to the Chinese game portfolio after December 2013.A correlation value 0.52, displayed in Table8, indicates the two portfolios are linearly interrelated with each other.
Figure 4. Cumulative returns for Korean and Chinese game industry portfolios