Does Nuclear Uncertainty Threaten Financial Markets?: The Attention Paid to North Korean Nuclear Threats and its Impact on South Korea's Financial Markets

Abstract

We explore how investor attention paid to dangerous nuclear tests in an adjacent country influences financial market outcomes. To measure the attention paid to North Korean nuclear threats, we introduce a weekly Google search volume index for keywords on North Korean nuclear events. Using a time-varying structural vector auto-regression model with block exogeneity restrictions, we find that investor attention paid to nuclear threats has heterogeneous effects on South Korea’s stock price across industries and over time: attention on only the first nuclear test was negatively related to stock price index, which vanished thereafter. Moreover, the investor attention paid to the nuclear risk reduced stock prices, especially in the banking industry, during the entire sample period.