S-Space College of Business Administration/Business School (경영대학/대학원) Dept. of Business Administration (경영학과) Seoul Journal of Business Seoul Journal of Business Volume 16, Number 1/2 (2010)
How do Investors in the Korean Stock Market React to Nuclear Threats from North Korea?
- CHOI, JE-JOON; PARK, HYOUNG-JIN
- Issue Date
- Seoul Journal of Business, Vol.16 No.2, pp. 39-66
- North Korea; nuclear test; market destabilization; positive feedback trading; herding behavior
- This article examines how investors react to nuclear threats from North
Korea on the South Korean stock market. To investigate the differences in
investor groups responses, we divide investors into three groups: domestic
individual, domestic institution and foreign investors. In addition, we
classify the nuclear threats into the one actual threat and the seven verbal
threats and compare trading activities of investors against those in the
peaceful period of 2004. The net-buying and LSV(1992) herding measures
are applied to examine investors trading behavior. Our results show that it
was only for the case of the actual threat that investors trades significantly
differed with the peaceful period. In addition, our results show that the
three investor groups reacted to the actual nuclear threat differently.
When the actual nuclear threat occurred, individuals sold, institutes and
foreigners bought stocks. Like in the peaceful period, institutes showed a
positive slope for lagged returns whereas individuals displayed a negative
slope. Foreigners, however, bought regardless of previous returns. Moreover,
LSV herding measure increased in all investor groups.