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The impact of geopolitical risk on stock returns: Evidence from inter-Korea geopolitics

Author

Listed:
  • Jung, Seungho
  • Lee, Jongmin
  • Lee, Seohyun

Abstract

We investigate how corporate stock returns respond to geopolitical risk in the case of South Korea, which has experienced large and unpredictable geopolitical swings that originate from North Korea. To do so, a monthly index of geopolitical risk from North Korea (the GPRNK index) is constructed using automated keyword searches in South Korean media. The GPRNK index, designed to capture both upside and downside risk, corroborates that geopolitical risk sharply increases with the occurrence of nuclear tests, missile launches, or military confrontations, and decreases significantly around the times of summit meetings or multilateral talks. Using firm-level data, we find that heightened geopolitical risk reduces stock returns, and that the reductions in stock returns are greater especially for large firms, firms with a higher share of domestic investors, and for firms with a higher ratio of fixed assets to total assets. These results suggest that international portfolio diversification and investment irreversibility are important channels through which geopolitical risk affects stock returns.

Suggested Citation

  • Jung, Seungho & Lee, Jongmin & Lee, Seohyun, 2021. "The impact of geopolitical risk on stock returns: Evidence from inter-Korea geopolitics," MPRA Paper 108006, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:108006
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    References listed on IDEAS

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    Cited by:

    1. Kim, Kyoochul, 2023. "The peace effects of inter-Korean trade and the political-economic separation: Analysis of the reciprocal effects of inter-Korean relations and inter-Korean trade," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 45(3), pages 1-24.
    2. Tam NguyenHuu & Deniz Karaman Orsal, 2022. "Geopolitical risks and financial stress in emerging economies," Working Papers 2022.09, International Network for Economic Research - INFER.
    3. Lee, Geesun, 2024. "The impact of North Korean nuclear threat on stock market linkages in Northeast Asia: The case of South Korea, China, and Japan," Finance Research Letters, Elsevier, vol. 66(C).
    4. Abdelaziz Eissa, Mohamed & Al Refai, Hisham, 2024. "Context-dependent responses to geopolitical risk in Middle Eastern and African stock markets: An asymmetric volatility spillover study," International Review of Economics & Finance, Elsevier, vol. 94(C).
    5. Khraiche, Maroula & Boudreau, James W. & Chowdhury, Md Shahedur R., 2023. "Geopolitical risk and stock market development," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    6. Minh Phuoc‐Bao Tran & Duc Hong Vo, 2024. "Can local and global geopolitical risk predict governments' military spending behaviour? International evidence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 71(4), pages 588-603, September.

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    More about this item

    Keywords

    Geopolitical risk; Textual analysis; Stock returns; Inter-Korean relations;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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