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

Cheolbeom Park () and Suyeon Park

Finance Research Letters, 2020, vol. 36, issue C

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.

Keywords: Rare disasters; Exchange rate; Nonparametric regression; Event study (search for similar items in EconPapers)
JEL-codes: F31 G12 G14 G15 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:36:y:2020:i:c:s1544612319303903

DOI: 10.1016/j.frl.2019.101314

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