The Impact of Geopolitical Risk on Stock Returns: Evidence from Inter-Korea Geopolitics

We investigate how corporate stock returns respond to geopolitical risk in the case of South Korea, which has experienced large and unpredictable swings that originate from North Korea. To do so, a monthly index Korea (the GPRNK index) is constructed using automated keyword searches Korean media. The index, designed capture both upside downside risk, corroborates sharply increases with occurrence nuclear tests, missile launches, or military confrontations, decreases significantly around times summit meetings multilateral talks. Using firm-level data, we find heightened reduces returns, reductions are greater especially for firms, firms higher share domestic investors, ratio fixed assets total assets. These results suggest international portfolio diversification investment irreversibility important channels through affects returns.