Geopolitical uncertainty drags down equity prices

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Geopolitical uncertainty drags down equity prices

Increased geopolitical uncertainty stemming from North Korean provocations tends to drag down equity prices and industrial output in South Korea, a report released on Monday showed.

“A 10 percent increase in geopolitical uncertainty causes equity prices to fall by 2.5 percent and the domestic currency to depreciate by 2 percent,” said Lee Seo-hyun, one of the authors of the report published by the Bank of Korea (BOK).

“It also drives down the consumer price index by 0.2 percent and industrial output by 0.3 percent within two to three months,” she added.

When geopolitical uncertainty decreases, the figures move in the opposite direction.

She said geopolitical uncertainty on the Korean Peninsula was measured by instrumental variables aimed at estimating causal relationships among diplomatic and military issues and the volatility of foreign exchange rates among other things.

Over the 2003-2017 period, there have been 40 significant events, such as North Korean missile launches and nuclear tests, that heightened geopolitical tensions, said the report.

But 47 positive issues like inter-Korean meetings and multilateral talks eased the atmosphere at the same time.

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