IDEAS home Printed from https://ideas.repec.org/a/bpj/pepspp/v20y2014i2p26n2.html
   My bibliography  Save this article

Rogue State Behavior and Markets: the Financial Fallout of North Korean Nuclear Tests

Author

Listed:
  • Kollias Christos

    (Department of Economics, University of Thessaly, Korai 43 Str. 38333 Volos, Greece)

  • Papadamou Stephanos

    (Department of Economics, University of Thessaly, Korai 43 Str. 38333 Volos, Greece)

  • Psarianos Iacovos

    (Department of Economics, University of Thessaly, Korai 43 Str. 38333 Volos, Greece)

Abstract

Financial markets react to major political events. The three nuclear tests conducted by North Korea in 2006, 2009 and 2013 are a sober confirmation of its on-going nuclear weapons program with the concomitant potential security threat this poses for the stability of the greater region. This article examines how nine regional stock exchanges reacted to the three nuclear tests given their important security repercussions. The results, although not uniformed across all countries and markets, revealed a greater adverse effect in the case of the second of the three tests. Given that the first test was announced in advance and the third was conducted in the midst of an on-going military crisis, this finding suggests that following the initial shock an unanticipated event can cause, markets can evaluate and absorb in a more efficient manner the news.

Suggested Citation

  • Kollias Christos & Papadamou Stephanos & Psarianos Iacovos, 2014. "Rogue State Behavior and Markets: the Financial Fallout of North Korean Nuclear Tests," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 20(2), pages 267-292, April.
    • Handle: RePEc:bpj:pepspp:v:20:y:2014:i:2:p:26:n:2
    DOI: 10.1515/peps-2013-0050
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/peps-2013-0050
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/peps-2013-0050?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cho, Young-Hyun & Linton, Oliver & Whang, Yoon-Jae, 2007. "Are there Monday effects in stock returns: A stochastic dominance approach," Journal of Empirical Finance, Elsevier, vol. 14(5), pages 736-755, December.
    2. Drakos, Konstantinos, 2010. "Terrorism activity, investor sentiment, and stock returns," Review of Financial Economics, Elsevier, vol. 19(3), pages 128-135, August.
    3. Christos Kollias & Stephanos Papadamou & Apostolos Stagiannis, 2010. "Armed Conflicts And Capital Markets: The Case Of The Israeli Military Offensive In The Gaza Strip," Defence and Peace Economics, Taylor & Francis Journals, vol. 21(4), pages 357-365.
    4. Massimo Guidolin & Eliana La Ferrara, 2010. "The economic effects of violent conflict: Evidence from asset market reactions," Journal of Peace Research, Peace Research Institute Oslo, vol. 47(6), pages 671-684, November.
    5. Wintrobe Ronald, 2013. "North Korea as a Military Dictatorship," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 19(3), pages 459-471, December.
    6. Athanassiou, Emmanuel & Kollias, Christos & Syriopoulos, Theodore, 2006. "Dynamic volatility and external security related shocks: The case of the Athens Stock Exchange," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(5), pages 411-424, December.
    7. Bilson, Christopher M. & Brailsford, Timothy J. & Hooper, Vincent C., 2002. "The explanatory power of political risk in emerging markets," International Review of Financial Analysis, Elsevier, vol. 11(1), pages 1-27.
    8. Kaplanski, Guy & Levy, Haim, 2010. "Sentiment and stock prices: The case of aviation disasters," Journal of Financial Economics, Elsevier, vol. 95(2), pages 174-201, February.
    9. Jun Sik Bae, 2004. "An Empirical Analysis of the Arms Race Between South and North Korea," Defence and Peace Economics, Taylor & Francis Journals, vol. 15(4), pages 379-392.
    10. Frey, Bruno S. & Kucher, Marcel, 2000. "World War II as reflected on capital markets," Economics Letters, Elsevier, vol. 69(2), pages 187-191, November.
    11. Tomasz Piotr Wisniewski, 2009. "Can political factors explain the behaviour of stock prices beyond the standard present value models?," Applied Financial Economics, Taylor & Francis Journals, vol. 19(23), pages 1873-1884.
    12. Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz Piotr, 2008. "Stock market volatility around national elections," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1941-1953, September.
    13. Kollias, Christos & Papadamou, Stephanos & Stagiannis, Apostolos, 2011. "Terrorism and capital markets: The effects of the Madrid and London bomb attacks," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 532-541, October.
    14. Bosch, Jean-Claude & Eckard, E Woodrow & Singal, Vijay, 1998. "The Competitive Impact of Air Crashes: Stock Market Evidence," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 503-519, October.
    15. Fotios Siokis & Panayotis Kapopoulos, 2007. "Parties, Elections And Stock Market Volatility: Evidence From A Small Open Economy," Economics and Politics, Wiley Blackwell, vol. 19(1), pages 123-134, March.
    16. Schwert, G William, 1990. "Stock Volatility and the Crash of '87," The Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 77-102.
    17. Chan, Yue-cheong & John Wei, K. C., 1996. "Political risk and stock price volatility: The case of Hong Kong," Pacific-Basin Finance Journal, Elsevier, vol. 4(2-3), pages 259-275, July.
    18. Daniel G. Arce & Todd Sandler, 2009. "Deterrence: Credibility And Proportionality," Economics and Politics, Wiley Blackwell, vol. 21(3), pages 384-408, November.
    19. Kawashima, Shingo & Takeda, Fumiko, 2012. "The effect of the Fukushima nuclear accident on stock prices of electric power utilities in Japan," Energy Economics, Elsevier, vol. 34(6), pages 2029-2038.
    20. French, Kenneth R., 1980. "Stock returns and the weekend effect," Journal of Financial Economics, Elsevier, vol. 8(1), pages 55-69, March.
    21. Perotti, Enrico C. & van Oijen, Pieter, 2001. "Privatization, political risk and stock market development in emerging economies," Journal of International Money and Finance, Elsevier, vol. 20(1), pages 43-69, February.
    22. Dyl, Edward A. & Maberly, Edwin D., 1992. "Odd-Lot Transactions around the Turn of the Year and the January Effect," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(4), pages 591-604, December.
    23. Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 13-32, June.
    24. Han Paul S., 2004. "Report on Critical Dimensions and Problems of the North Korean Situation (1996-2004)," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 10(3), pages 1-43, December.
    25. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    26. Chen, Andrew H. & Siems, Thomas F., 2004. "The effects of terrorism on global capital markets," European Journal of Political Economy, Elsevier, vol. 20(2), pages 349-366, June.
    27. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    28. Rodolphe Desbordes, 2010. "Global And Diplomatic Political Risks And Foreign Direct Investment," Economics and Politics, Wiley Blackwell, vol. 22(1), pages 92-125, March.
    29. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    30. Jef Vuchelen, 2003. "Electoral systems and the effects of political events on the stock market: The Belgian case," Economics and Politics, Wiley Blackwell, vol. 15(1), pages 85-102, March.
    31. Isard Walter & Azis Iwan J., 1999. "A Cooperative Analysis Procedure for Use by Diplomats and Negotiators: With a Proposed Step for Resolving Conflict on the Korean Peninsula," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 5(1), pages 1-24, January.
    32. Khusrav Gaibulloev & Todd Sandler, 2008. "Growth Consequences of Terrorism in Western Europe," Kyklos, Wiley Blackwell, vol. 61(3), pages 411-424, August.
    33. Bruno Frey & Marcel Kucher, 2001. "Wars and Markets: How Bond Values Reflect the Second World War," Economica, London School of Economics and Political Science, vol. 68(271), pages 317-333, August.
    34. Arin, K. Peren & Ciferri, Davide & Spagnolo, Nicola, 2008. "The price of terror: The effects of terrorism on stock market returns and volatility," Economics Letters, Elsevier, vol. 101(3), pages 164-167, December.
    35. Azis Iwan J. & Mitra Sabyasachi & Baluga Anthony, 2013. "Global Shock and Regional Spillovers," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 19(2), pages 183-211, August.
    36. Bali, Turan G. & Cakici, Nusret, 2010. "World market risk, country-specific risk and expected returns in international stock markets," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1152-1165, June.
    37. Christos Kollias & Stephanos Papadamou & Vangelis Arvanitis, 2013. "Symposium - Does Terrorism Affect the Stock-Bond Covariance? Evidence from European Countries," Southern Economic Journal, John Wiley & Sons, vol. 79(4), pages 832-848, April.
    38. Chesney, Marc & Reshetar, Ganna & Karaman, Mustafa, 2011. "The impact of terrorism on financial markets: An empirical study," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 253-267, February.
    39. Fields, M. Andrew & Janjigian, Vahan, 1989. "The effect of Chernobyl on electric-utility stock prices," Journal of Business Research, Elsevier, vol. 18(1), pages 81-87, January.
    40. Isard Walter & Chung Yun Ho, 2000. "A Proposal for North/South Korea Cooperation That Proved Effective: A Plea for More Multi-Analytic Approaches in Conflict Management," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 6(3), pages 1-13, July.
    41. Roger Koenker & Kevin F. Hallock, 2001. "Quantile Regression," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 143-156, Fall.
    42. Amihud, Yakov & Wohl, Avi, 2004. "Political news and stock prices: The case of Saddam Hussein contracts," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 1185-1200, May.
    43. Chen, Carl R., 1984. "The structural stability of the market model after the Three Mile Island accident," Journal of Economics and Business, Elsevier, vol. 36(1), pages 133-140, February.
    44. Hicks Michael J. & Smith Jeff, 2009. "Warfare, Civil Conflict and the Spatial Impacts on Domestic Investment: Evidence from South America, 1950-2000," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 15(1), pages 102-113, November.
    45. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
    46. Khusrav Gaibulloev & Todd Sandler, 2009. "The Impact Of Terrorism And Conflicts On Growth In Asia," Economics and Politics, Wiley Blackwell, vol. 21(3), pages 359-383, November.
    47. Han Sung Hun, 2005. "Report on Critical Dimensions and Problems of the North Korean Situation (1995 - 2004)," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 11(1), pages 96-139, May.
    48. Shoham Amir & Rosenboim Mosi & Malul Miki & Saadon Yossi, 2011. "Core and Periphery -- The Dual Effect of Terror," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 17(1), pages 1-15, September.
    49. Choudhry, Taufiq, 2010. "World War II events and the Dow Jones industrial index," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1022-1031, May.
    50. Elena Corallo, 2007. "The effect of the war risk: a comparison of the consequences of the two Iraq wars," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 54(3), pages 371-382, September.
    51. Isard Walter & Han Sung Hun, 2008. "Mediation Analysis: The Use of Regional Science Methods to Resolve Conflicts," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 13(2), pages 78-88, January.
    52. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. In Huh & Ju Hyun Pyun, 2018. "Does Nuclear Uncertainty Threaten Financial Markets? The Attention Paid to North Korean Nuclear Threats and Its Impact on South Korea's Financial Markets," Asian Economic Journal, East Asian Economic Association, vol. 32(1), pages 55-82, March.
    2. Finer, David Andrew, 2022. "No Shock Waves through Wall Street? Market Responses to the Risk of Nuclear War," Working Papers 318, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    3. Al-Ississ Mohamad, 2015. "The Cross-Border Impact of Political Violence," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 21(2), pages 239-272, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kollias, Christos & Kyrtsou, Catherine & Papadamou, Stephanos, 2013. "The effects of terrorism and war on the oil price–stock index relationship," Energy Economics, Elsevier, vol. 40(C), pages 743-752.
    2. Mnasri, Ayman & Nechi, Salem, 2016. "Impact of terrorist attacks on stock market volatility in emerging markets," Emerging Markets Review, Elsevier, vol. 28(C), pages 184-202.
    3. Kaplanski, Guy & Levy, Haim, 2010. "Sentiment and stock prices: The case of aviation disasters," Journal of Financial Economics, Elsevier, vol. 95(2), pages 174-201, February.
    4. Antonakakis, Nikolaos & Gupta, Rangan & Kollias, Christos & Papadamou, Stephanos, 2017. "Geopolitical risks and the oil-stock nexus over 1899–2016," Finance Research Letters, Elsevier, vol. 23(C), pages 165-173.
    5. Fatma Ben Moussa & Mariem Talbi, 2019. "Stock Market Reaction to Terrorist Attacks and Political Uncertainty: Empirical Evidence from the Tunisian Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 9(3), pages 48-64.
    6. Wisniewski, Tomasz Piotr, 2016. "Is there a link between politics and stock returns? A literature survey," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 15-23.
    7. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 188-199.
    8. Urquhart, Andrew & Hudson, Robert, 2016. "Investor sentiment and local bias in extreme circumstances: The case of the Blitz," Research in International Business and Finance, Elsevier, vol. 36(C), pages 340-350.
    9. Rubin, Ofir D. & Ihle, Rico & Kachel, Yael & Goodwin, Barry K., 2013. "The impact of violent political conflict on commodity prices: The Israeli food market," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150961, Agricultural and Applied Economics Association.
    10. Omar, Ayman M.A. & Lambe, Brendan J & Wisniewski, Tomasz Piotr, 2021. "Perceptions of the threat to national security and the stock market," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 504-522.
    11. Bouoiyour, Jamal & Selmi, Refk & Hammoudeh, Shawkat & Wohar, Mark E., 2019. "What are the categories of geopolitical risks that could drive oil prices higher? Acts or threats?," Energy Economics, Elsevier, vol. 84(C).
    12. Corbet, Shaen & Gurdgiev, Constantin & Meegan, Andrew, 2018. "Long-term stock market volatility and the influence of terrorist attacks in Europe," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 118-131.
    13. Al-Ississ Mohamad, 2015. "The Cross-Border Impact of Political Violence," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 21(2), pages 239-272, April.
    14. Christos Kollias & Stephanos Papadamou & Vangelis Arvanitis, 2013. "Symposium - Does Terrorism Affect the Stock-Bond Covariance? Evidence from European Countries," Southern Economic Journal, Southern Economic Association, vol. 79(4), pages 832-848, April.
    15. Hudson, Robert & Urquhart, Andrew, 2015. "War and stock markets: The effect of World War Two on the British stock market," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 166-177.
    16. Christos Kollias & Stephanos Papadamou & Vangelis Arvanitis, 2013. "Does Terrorism Affect the Stock‐Bond Covariance? Evidence from European Countries," Southern Economic Journal, John Wiley & Sons, vol. 79(4), pages 832-848, April.
    17. Christos Kollias & Stephanos Papadamou & Vangelis Arvanitis, 2013. "Symposium - Does Terrorism Affect the Stock-Bond Covariance? Evidence from European Countries," Southern Economic Journal, John Wiley & Sons, vol. 79(4), pages 832-848, April.
    18. Gupta, Rangan & Majumdar, Anandamayee & Pierdzioch, Christian & Wohar, Mark E., 2017. "Do terror attacks predict gold returns? Evidence from a quantile-predictive-regression approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 276-284.
    19. Kollias, Christos & Manou, Efthalia & Papadamou, Stephanos & Stagiannis, Apostolos, 2011. "Stock markets and terrorist attacks: Comparative evidence from a large and a small capitalization market," European Journal of Political Economy, Elsevier, vol. 27(S1), pages 64-77.
    20. Balcilar, Mehmet & Bonato, Matteo & Demirer, Riza & Gupta, Rangan, 2018. "Geopolitical risks and stock market dynamics of the BRICS," Economic Systems, Elsevier, vol. 42(2), pages 295-306.

    More about this item

    Keywords

    nuclear tests and financial markets; event studies; GARCH models; quantile regression;
    All these keywords.

    JEL classification:

    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:pepspp:v:20:y:2014:i:2:p:26:n:2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.