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

Research on political risk tends to elucidate that political news affects nancial markets. Especially stock markets respond to new information regarding political decisions that may affect domestic and foreign policy. In this study, we examined the effect of good and bad political news on returns and volatility for this We employ the EGARCH model proposed by Engle and Victor (1991) as it allows good and bad news to have a different impact on volatility.Our result shows that good news has positive impact on the stock returns and also decreased the volatility.On the other hand, bad political news has negative influence on the returns (decrease the returns) and increase the volatility (positive effect)."

Little work has been done to characterize the empirical effects of political events on financial markets. In this paper we attempt to measure the impact of political risk on asset prices, focusing on the Hong Kong equity market. Hong Kong serves as the ideal case study, for two reasons: the political situation is fluid, unpredictable, and characterized by the occurrence of definitive events, and the market movements are volatile, partially reflecting the political event risk. We focus on the 1989-1993 period, during which political issues such as the question of Hong Kong s democracy after 1997, China s most-favored-nation trade status, and China s human rights development and political reform movement have all contributed to Hong Kong s stock price movements. Modeling market volatility using a jump-diffusion process finds that the volatility of the benchmark Hang Seng Index is driven by a highly persistent component, punctuated by large jumps which are highly related to political events. These results suggest that the Hong Kong market is affected by both economic and political factors which impact future profitability and investor confidence.

This thesis consists of three substantive chapters (3, 4, 5) on the impact of political risk on equity and exchange rate returns and their volatilities. Chapter 3 proposes a framework for predicting market returns and volatility using changes in the country's political risk. We identify the appropriate lag to to calculate changes over, and how the changes should be included in mean and volatility equations. The level of aggregation of political risk variable is also examined. Analysing 47 emerging and 21 developed markets, we find predictive power primarily for volatility of emerging markets, and recommended use of three political risk components which suitably capture important dimensions of political environment. In the Chapter 4 we empirically examines the impact of political risk on returns and volatility of individual firms and industry portfolios from New Zealand and Pakistan. The data used in the study consist of 184 firms from New Zealand and 202 firms from Pakistan along with country-level political risk data from the ICRG. As in the , we find in Chapter 3 that the impact of political risk is more on volatility than the returns of firms in both markets. As we expect, the impact of political risk is more on Pakistani firms compared to those in New Zealand. Overall, results from the industry portfolios are according to the hypothesis that political risk impact is different across industries (volatility increase for some industries and decrease for few). Chapter 5 examine the relationship between political risk variables on the nominal exchange rate return and its volatility. We again investigate developed versus developed markets, and also consider three different exchange rate regimes i.e. floating, managed floating and fixed. This is important to examine the link between political risk and exchange rate because there are two sources of political risk one on either side of the exchange rate. In our analysis, we use the political risk spread between the count

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