Journal
FINANCE RESEARCH LETTERS
Volume 36, Issue -, Pages -Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.frl.2019.101314
Keywords
Rare disasters; Exchange rate; Nonparametric regression; Event study
Categories
Funding
- Bank of Korea
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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.
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