Geopolitical Risk on Stock Returns: Evidence from Inter-Korea Geopolitics

By Seungho Jung, Jongmin Lee, Seohyun Lee

October 22, 2021

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Seungho Jung, Jongmin Lee, and Seohyun Lee. Geopolitical Risk on Stock Returns: Evidence from Inter-Korea Geopolitics, (USA: International Monetary Fund, 2021) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Asset prices, Economic cooperation, Financial institutions, Financial markets, International organization, Prices, Stock markets, Stocks

Keywords: Asset prices, Economic cooperation, Firms' stock, Geopolitical risk, Global, GPRNK index, GPRNK trend, Growth outlook, Inter-Korean relations., Search keyword, Stock markets, Stock return, Stock returns, Stocks, Textual analysis

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/251
Stock No:

WPIEA2021251
ISBN:

9781557759672
ISSN:

1018-5941

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