How credible is the North Korean threat?

Abstract

We perform event analysis on particular episodes of tension in the Korean peninsula between 2000 and 2008, and investigate the effect of the events on South Korean financial markets (stock markets, bond yield spreads and the exchange rate) given that South Korea would be the first affected by a military aggression from North Korea. Surprisingly, in nearly all cases, these events, which have often been dramatized in the world media, have no significant impact on either of these variables or only a very small one. We also find no significant impact of events on listed firms that would a priori be likely to suffer from increased tension between the two Koreas. Since financial markets often contain better predictions than expert opinions or surveys, these results strongly suggest that the North Korean threat is non‐credible.

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

“…Among the literature investigating the effects of North Korean tensions on South Korean financial markets, a large number of earlier studies employ event studies to identify geopolitical risk. A prominent example using event studies is Kim and Roland (2014). They select 26 important events related to tensions on the Korean Peninsula to estimate the cumulative abnormal return (CAR) on the KOSPI index, the sovereign bond yield, and the Korean won exchange rate against the U.S. dollar.…”

Does Nuclear Uncertainty Threaten Financial Markets? The Attention Paid to North Korean Nuclear Threats and Its Impact on South Korea's Financial Markets

“…Dibooglu and Cevik () introduce the proprietary North Korean Threat Index (NKTI) constructed by NK News and show that North Korean threats affect stock and foreign exchange returns in both South Korea and Japan, but they have an insignificant effect on the overnight interest rate in either country. Kim and Roland () do not find any significant effect of North Korean military provocations on South Korea's financial markets based on daily information of North Korea's threats and South Korea's financial market variables from 2000 to 2008.…”

“…While many previous studies on political risks (including those orchestrated by North Korea) approach such issues with an event study analysis or identify each catastrophic event using a dummy variable (e.g. Kim and Roland, ; Kollias et al, ), this study uses the Google SVI to successfully measure the intensity and variation of the risks perceived by agents and overcomes the shortcoming of treating various North Korean risks as identical events. A notable exception is Dibooglu and Cevik (): their approach is similar to ours as they consider the intensity of North Korea's threat using a news index (i.e.…”

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

“…Among the literature investigating the effects of North Korean threats on South Korean financial markets, a large number of earlier studies employ event studies to identify geopolitical risk. A prominent example using event studies is Kim and Roland (2014). They select 26 important events related to tensions on the Korean Peninsula to estimate the cumulative abnormal return (CAR) on the KOSPI index, the sovereign bond yield, and the Korean won exchange rate against the U.S. dollar.…”