Abstract
This study investigates the impact of North Korea’s nuclear tests on Asian stock markets. Two approaches are used separately in order to identify how stock market returns and volatilities change immediately after the nuclear tests. We find that the Chinese stock market tends to be more sensitive to unexpected shocks from North Korea’s nuclear tests than other Asian stock markets. However, relatively, the Japanese stock market is little influenced by the nuclear tests though Japan is not only geographically close to North Korea but also politically vigilant to North Korea’s nuclear threats. Also, we find that strengthened return correlations (linearity) do not necessarily increase stock return volatilities.
Highlights
Since the Korean War ended in a military armistice in 1953, sporadic military threats of North Korea have threatened the security and economy of its southern counterpart, South Korea
Japan is geographically close to North Korea and is politically vigilant to North Korea’s nuclear tests, its stock market does not have any significant correlation change except only for the first nuclear test as a first unexpected shock
A few studies investigate the financial impact of North Korea’s nuclear tests on the South Korean stock market, and overall, it is shown that those nuclear tests substantially influence the South Korean stock market
Summary
Since the Korean War ended in a military armistice in 1953, sporadic military threats of North Korea have threatened the security and economy of its southern counterpart, South Korea. Some studies show how North Korea’s nuclear tests affect the South Korean stock market (Choi & Park, 2010; Lim, 2012; Kollias et al, 2014; Kim & Roland, 2014; Huh & Pyun, 2018). Since no studies examine the impact of North Korea’s nuclear tests on Asian stock markets other than the South Korean stock market, the purpose of our study is to extend previous research on the financial impact of North Korea’s nuclear tests by considering adjacent Asian countries. Is there any significant change in return movements of Asian stock markets (other than the South Korean stock market) immediately after North Korea’s nuclear tests? Are the volatilities of Asian stock markets affected by North Korea’s nuclear tests in the same manner? Is there any significant change in return movements of Asian stock markets (other than the South Korean stock market) immediately after North Korea’s nuclear tests? Second, are the volatilities of Asian stock markets affected by North Korea’s nuclear tests in the same manner? Our study provides new insights into the literature by seeking to answer these questions
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