Rare disaster risk and exchange rates: An empirical investigation of South Korean exchange rates under tension between the two Koreas

Cheolbeom Park; Suyeon Park

doi:10.1016/j.frl.2019.101314

Rare disaster risk and exchange rates: An empirical investigation of South Korean exchange rates under tension between the two Koreas

Cheolbeom Park, Suyeon Park

Department of Economics

Research output: Contribution to journal › Article › peer-review

6 Citations (Scopus)

Abstract

We investigate the rare disaster hypothesis. Assuming that news articles reporting North Korea's actions that raise tensions on the Korean peninsula affect the probability and expected damage of a disastrous war in the region, we find by applying nonparametric regression that the South Korean exchange rate depreciates as the number of such news articles increases. We also find through an event study that the South Korean exchange rate depreciates immediately after nuclear tests, although its duration is short. The response of the exchange rate to news escalating tension levels varies over time, which is similar to the habituation learning process.

Original language	English
Article number	101314
Journal	Finance Research Letters
Volume	36
DOIs	https://doi.org/10.1016/j.frl.2019.101314
Publication status	Published - 2020 Oct

Keywords

Event study
Exchange rate
Nonparametric regression
Rare disasters

ASJC Scopus subject areas

Finance

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10.1016/j.frl.2019.101314

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title = "Rare disaster risk and exchange rates: An empirical investigation of South Korean exchange rates under tension between the two Koreas",

abstract = "We investigate the rare disaster hypothesis. Assuming that news articles reporting North Korea's actions that raise tensions on the Korean peninsula affect the probability and expected damage of a disastrous war in the region, we find by applying nonparametric regression that the South Korean exchange rate depreciates as the number of such news articles increases. We also find through an event study that the South Korean exchange rate depreciates immediately after nuclear tests, although its duration is short. The response of the exchange rate to news escalating tension levels varies over time, which is similar to the habituation learning process.",

keywords = "Event study, Exchange rate, Nonparametric regression, Rare disasters",

author = "Cheolbeom Park and Suyeon Park",

note = "Funding Information: We are grateful to an anonymous referee for helpful comments. We also thank conference and seminar participants at Hanyang University, 2018 IEFS-EAER conference, 2018 Asian Economic Outlook and Challenges to Growth and Stability, 2019 WEAI 15th International Conference, and 2019 North American Summer Meeting of Econometric Society. This study is financially supported by Bank of Korea. Usual disclaimers apply. Publisher Copyright: {\textcopyright} 2019 Elsevier Inc.",

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N2 - We investigate the rare disaster hypothesis. Assuming that news articles reporting North Korea's actions that raise tensions on the Korean peninsula affect the probability and expected damage of a disastrous war in the region, we find by applying nonparametric regression that the South Korean exchange rate depreciates as the number of such news articles increases. We also find through an event study that the South Korean exchange rate depreciates immediately after nuclear tests, although its duration is short. The response of the exchange rate to news escalating tension levels varies over time, which is similar to the habituation learning process.

AB - We investigate the rare disaster hypothesis. Assuming that news articles reporting North Korea's actions that raise tensions on the Korean peninsula affect the probability and expected damage of a disastrous war in the region, we find by applying nonparametric regression that the South Korean exchange rate depreciates as the number of such news articles increases. We also find through an event study that the South Korean exchange rate depreciates immediately after nuclear tests, although its duration is short. The response of the exchange rate to news escalating tension levels varies over time, which is similar to the habituation learning process.

KW - Event study

KW - Exchange rate

KW - Nonparametric regression

KW - Rare disasters

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JO - Finance Research Letters

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ER -

Rare disaster risk and exchange rates: An empirical investigation of South Korean exchange rates under tension between the two Koreas

Abstract

Keywords

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