Geopolitical Risk on Stock Returns

Evidence from Inter-Korea Geopolitics

Bibliographic Data

ID19037410
AuthorsSeungho Jung (0000-0001-8339-441X, corresponding author), Jongmin Lee (0000-0002-5348-3961), Seohyun Lee (0000-0002-0007-4419)
Year2021
Volume2021
Issue251
Pages1-1
Publication date2021-10-01
Open AccessYes
TypeARTICLE
VenueIMF Working Paper (JOURNAL)
Journal identifiersISSN: 1018-5941 • E-ISSN: 2227-8885
PublisherInternational Monetary Fund (PUBLISHER • US)
DOI10.5089/9781557759672.001
OpenAlexW3208529717
ISBN9781557759672
LanguageEN
Citations received2
References cited8

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

Business · Geography · Geopolitics · Political science · Economic Sanctions and International Relations · Market Dynamics and Volatility · Risk Management in Financial Firms

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