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
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: Suggested Citation