Political Risk and Stock Returns: The Case of Hong Kong

66 Pages Posted: 11 Nov 2008

See all articles by Harold Y. Kim

Harold Y. Kim

Stanford University

Jianping Mei

New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 1994


Little work has been done to characterize the empirical effects of political events on financial markets. In this paper we attempt to measure the impact of political risk on asset prices, focusing on the Hong Kong equity market. Hong Kong serves as the ideal case study, for two reasons: the political situation is fluid, unpredictable, and characterized by the occurrence of definitive events, and the market movements are volatile, partially reflecting the political event risk. We focus on the 1989-1993 period, during which political issues such as the question of Hong Kong s democracy after 1997, China s most-favored-nation trade status, and China s human rights development and political reform movement have all contributed to Hong Kong s stock price movements. Modeling market volatility using a jump-diffusion process finds that the volatility of the benchmark Hang Seng Index is driven by a highly persistent component, punctuated by large jumps which are highly related to political events. These results suggest that the Hong Kong market is affected by both economic and political factors which impact future profitability and investor confidence.

Keywords: jump-diffusion process, volatility, democracy, mostfavored-nation trade status

Suggested Citation

Kim, Harold Y. and Mei, Jianping, Political Risk and Stock Returns: The Case of Hong Kong (December 1994). NYU Working Paper No. FIN-94-039. Available at SSRN: https://ssrn.com/abstract=1299474

Harold Y. Kim (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Jianping Mei

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

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