Title Page
INTERNATIONAL MONETARY FUND
The Impact of Geopolitical Risk on Stock Returns: Evidence from Inter-Korea Geopolitics
Seungho Jung, Jongmin Lee, Seohyun Lee WP/21/251
2021
[OCT]
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© 2021 International Monetary Fund
Asia and Pacific Department
The Impact of Geopolitical Risk on Stock Returns: Evidence from Inter-Korea Geopolitics
Authorized by Andreas Bauer WP/21/251
Seungho Jung1, Jongmin Lee2, Seohyun Lee3
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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.
| ISBN | 978-1-51358-###-# (Paper) 978-1-51358-###-# (ePub) 978-1-51358-###-# (PDF) |
| JEL Classification Numbers: | D80, G10, H56 |
| Keywords: [Type Here] | Geopolitical risk, Textual analysis, Stock returns, Inter-Korean relations. |
| Author’s E-Mail Address: | slee6@imf.org |
| ISBN | 978-1-51358-###-# (Paper) 978-1-51358-###-# (ePub) 978-1-51358-###-# (PDF) |
| JEL Classification Numbers: | D80, G10, H56 |
| Keywords: [Type Here] | Geopolitical risk, Textual analysis, Stock returns, Inter-Korean relations. |
| Author’s E-Mail Address: | slee6@imf.org |
Table of Contents
ABSTRACT
1. INTRODUCTION
2. MEASURING GEOPOLITICAL RISK FROM INTER-KOREA RELATIONS
2.1. Scope of Geopolitical Risk
2.2. Data and Methodology
2.3. Evaluating the GPRNK Index
3. EMPIRICAL FRAMEWORK
3.1. Estimation Model
3.2. Data
4. RESULTS
4.1. Baseline Results
4.2. Robustness
5. CONCLUSION
REFERENCES
FIGURES
1. The GPRNK Index (1995–2020)
2. The GPRNK Index by Topic
3. Comparing the GPRNK Index with Existing Measure
4. Assessing Potential Selection Bias of the GPRNK Index
TABLES
1. Search Keywords
2. Variable Description
3. Summary Statistics
4. GPRNK and Firms’ Stock Return: Average Effects
5. GPRNK and Firms’ Stock Return: Differential Effects by Firm Characteristics
6. GPRNK and Firms’ Stock Return: Result with Subtopic Indices
7. Regression Results with Alternative Measures
8. Robustness Check: Results from Restricted Sample
APPENDICES
A.1. Details of Media Sample of GPRNK Index
A.2. Additional Robustness Checks
A.3. Additional Understanding of GPRNK Trend
Assistant Professor, Incheon National University, School of Northeast Asian Studies. Email: shjung@inu.ac.kr.
Economist, Economic Research Institute, Bank of Korea. Email ljm1208@bok.or.kr.
Corresponding author, Economist, Asia Pacific Department, International Monetary Fund and Bank of Korea. Email: slee6@imf.org. We thank Andreas Bauer, Taehyoung Cho, Steven Davis, In Huh, Byung-Yeon Kim, Hyejin Kim and an anonymous referee for their constructive and insightful comments and helpful suggestions. We are grateful for useful comments from seminar participants at the Bank of Korea, the 2021 IAAE Annual Conference and the 2021 Korean Economic Association International Economic Conference.
