Political risk matters—Evidence from the Sino-British Hong Kong talks

Abstract

One of the most rapidly growing research areas in international business has been political risk assessment. In his pioneering study, Niederhoffer [JB, 1971] examined relations between world events and movements in stock prices. Recently, Cosset and Rianderie [JIBS, 1985] examined the impact of the political climate on foreign exchange rates. In this study, the authors investigate the impact of the Sino-British political talks on the Hongkong stock market. "Talks" used in this study are the headlines appearing in the major newspapers in Hongkong and in Taiwan, in which the date of announcement falls within the period starting November 8, 1980 (the first day when the Sino-British talks was reported) and ending May 27, 1985 (the day when both sides exchanged the ratified accord). There are 112 political events thereby retrieved. Viewed from the perspective of Hongkong stock investors, the 112 events are further partitioned into four mutually exclusive categories; favorable, unfavorable, ambiguous (in most cases, favorable and unfavorable events are reported on the very same day), and inderteminate (primarily caused by the successive arrival of events). Movements in the stock prices following the reporting of the 60 favorable and 21 unfavorable events are then analyzed. Among the 60 favorable events, Hang-Seng stock price indices are found to move upward in the next day in 45 events. As for the unfavorable events, Hang-Seng stock price indices move downward in 16 out of 21 cases. The patterns of movements are in conformity of our expectation. Futhermore, when the sign test is applied in turn to the favorable and the unfavorable group, the null hypothesis that the reporting of Hongkongstatus-related political news has no impact on the movement of the stock price index in Hongkong can be rejected at .05 significance level for each group. On such reinforcing results, the authors therefore conclude that the Sino-British political talks, as expected, have affected the Hongkong stock market.