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

IMF Working Papers, October 22, 2021

Source details

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

Authors: Seungho Jung, Jongmin Lee, Seohyun Lee
Publication date: October 22, 2021
Type: IMF Working Paper (Working Paper No. 2021/251)
Pages: 36
DOI: https://doi.org/10.5089/9781557759672.001
Issue: 251
Volume: 2021
Stock No: WPIEA2021251
ISBN: 9781557759672
ISSN: 1018-5941
Subject tags: 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

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 is designed to capture both upside and downside risk.

The GPRNK index corroborates that geopolitical risk:
- sharply increases with the occurrence of nuclear tests, missile launches, or military confrontations;
- decreases significantly around the times of summit meetings or multilateral talks.

Heightened geopolitical risk reduces stock returns.
Reductions in stock returns are greater for:
- large firms;
- firms with a higher share of domestic investors;
- firms with a higher ratio of fixed assets to total assets.

The results suggest two important channels through which geopolitical risk affects stock returns:
- international portfolio diversification;
- investment irreversibility.

Implied source: IMF Working Papers — "Geopolitical Risk on Stock Returns: Evidence from Inter-Korea Geopolitics" (Working Paper No. 2021/251).