Political Conflict and Foreign Portfolio Investment: Evidence from North Korean Attacks

47 Pages Posted: 17 Mar 2012 Last revised: 7 Oct 2014

See all articles by Jeffrey R. Gerlach

Jeffrey R. Gerlach

Federal Reserve Banks - Federal Reserve Bank of Richmond

Youngsuk Yook

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2014

Abstract

We examine the response of foreign investors to escalating political conflict and its impact on the South Korean stock market surrounding 13 North Korean military attacks between 1999 and 2010. Using domestic institutions and domestic individuals as benchmarks, we evaluate the trading behavior and performance of foreign investors. Following attacks, foreigners increase their holdings and buy more shares of risky stocks proxied by high book-to-market ratios. Performance results show foreigners maintain their pre-attack level of performance while domestic individuals, who make the overwhelming majority of domestic trades, perform worse. Domestic institutions improve their performance. Overall, the results are consistent with the predictions based on the benefits of international diversification. Foreigners trade more shares than usual, providing more liquidity while domestic individuals trade substantially less. Foreigners also deviate from their general strategy of positive feedback trading, a strategy that could destabilize the market further in the short run.

Keywords: Foreign Portfolio Investment, Political Conflict, North Korean Attacks

Suggested Citation

Gerlach, Jeffrey R. and Yook, Youngsuk, Political Conflict and Foreign Portfolio Investment: Evidence from North Korean Attacks (October 1, 2014). Available at SSRN: https://ssrn.com/abstract=2022851 or http://dx.doi.org/10.2139/ssrn.2022851

Jeffrey R. Gerlach

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Youngsuk Yook (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-475-6324 (Phone)

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