Investor Trading Behavior Around the Time of Geopolitical Risk Events: Evidence from South Korea

57 Pages Posted: 4 Sep 2014 Last revised: 28 Mar 2015

See all articles by Y. Han (Andy) Kim

Y. Han (Andy) Kim

Sungkyunkwan University

Hosung Jung

The Bank of Korea; Bank of Korea - Economic Research Institute

Date Written: March 13, 2015

Abstract

How do investors trade before and after geopolitical risk events and do some short sell with their potential informational advantage? The South Korean stock market gives an interesting testing ground because the nuclear weapons testing and military aggressions by its belligerent neighbor, North Korea, are exogenous. Moreover, as North Korea has transitioned from a state without nuclear weapons to one with substantial nuclear capabilities, investors have revised their beliefs about the level of geopolitical risk with each weapon testing. Using microstructure data of South Korean stock market from 1999 to 2012, we find a permanent negative abnormal return of -1.59% in the South Korean market (and -0.88% for the US market) for nuclear weapons testing, but only transitory response to military attacks. We find a significant increase in abnormal short selling volume before the events from non-resident foreign institutions of the countries having diplomatic relations with North Korea.

Keywords: Geopolitical Risk, political insider trading, North Korea, nuclear weapons, military aggression, short selling, individual investors, institutional investors, foreign investors

JEL Classification: G10; G14; G15; H56

Suggested Citation

Kim, Y. Han (Andy) and Jung, Hosung, Investor Trading Behavior Around the Time of Geopolitical Risk Events: Evidence from South Korea (March 13, 2015). Available at SSRN: https://ssrn.com/abstract=2490699 or http://dx.doi.org/10.2139/ssrn.2490699

Y. Han (Andy) Kim (Contact Author)

Sungkyunkwan University ( email )

422 School of Business
25-2 SungKyunKwan-Ro, Jongno-ju
Seoul, 110-745
Korea, Republic of (South Korea)
+82-2-760-0622 (Phone)
+82-2-760-0622 (Fax)

HOME PAGE: http://https://sites.google.com/site/andyyhankim/

Hosung Jung

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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