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Rare disaster risk and exchange rates: An empirical investigation of South Korean exchange rates under tension between the two Koreas

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  • Park, Cheolbeom
  • Park, Suyeon

Abstract

We investigate the rare disaster hypothesis. Assuming that news articles reporting North Korea's actions that raise tensions on the Korean peninsula affect the probability and expected damage of a disastrous war in the region, we find by applying nonparametric regression that the South Korean exchange rate depreciates as the number of such news articles increases. We also find through an event study that the South Korean exchange rate depreciates immediately after nuclear tests, although its duration is short. The response of the exchange rate to news escalating tension levels varies over time, which is similar to the habituation learning process.

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  • Park, Cheolbeom & Park, Suyeon, 2020. "Rare disaster risk and exchange rates: An empirical investigation of South Korean exchange rates under tension between the two Koreas," Finance Research Letters, Elsevier, vol. 36(C).
    • Handle: RePEc:eee:finlet:v:36:y:2020:i:c:s1544612319303903
    DOI: 10.1016/j.frl.2019.101314
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    More about this item

    Keywords

    Rare disasters; Exchange rate; Nonparametric regression; Event study;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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