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

Seungho Jung, Jongmin Lee and Seohyun Lee

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Geopolitical risk; Textual analysis; Stock returns; Inter-Korean relations (search for similar items in EconPapers)
JEL-codes: D80 G10 H56 (search for similar items in EconPapers)
Date: 2021-05-27
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (7)

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