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

45 Pages Posted: 2 May 2016

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: 2016-04

Abstract

We examine the response of foreign (i.e., non-South Korean) 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 (i.e., South Korean) institutions and individuals as benchmarks, we evaluate the trading behavior and performance of foreign investors. Following attacks, foreigners increase their holdings of Korean stocks and buy more shares of risky stocks. Performance results show foreigners maintain their pre-attack level of performance while domestic individuals, who make the overwhelming majority of domestic trades, perform worse. In addition, domestic institutions improve their performance. Overall, the results are consistent with the predictions based on the benefits of international diversification. Unlike domestic individuals, foreigners trade more shares than usual and deviate from their general strategy of positive feedback trading.

Keywords: Political conflict, Foreign portfolio investment, North Korean attacks

Suggested Citation

Gerlach, Jeffrey R. and Yook, Youngsuk, Political Conflict and Foreign Portfolio Investment: Evidence from North Korean Attacks (2016-04). FEDS Working Paper No. 2016-037. Available at SSRN: https://ssrn.com/abstract=2772900 or http://dx.doi.org/10.17016/FEDS.2016.037

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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