Political Risk and Stock Returns: The Case of Hong Kong

Posted: 13 Sep 1999

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


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, particularly 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 Honk 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.

JEL Classification: F47

Suggested Citation

Kim, Harold Y. and Mei, Jianping, Political Risk and Stock Returns: The Case of Hong Kong. Available at SSRN: https://ssrn.com/abstract=6340

Harold Y. Kim

Stanford University ( email )

Stanford, CA 94305
United States

Jianping Mei (Contact Author)

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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