Rogue state behavior and markets: The financial fallout of North Korean nuclear tests

Abstract

Financial markets react to major political events. The three nuclear tests conducted by North Korea in 2006, 2009 and 2013 are a sober confirmation of its on-going nuclear weapons program with the concomitant potential security threat this poses for the stability of the greater region. This article examines how nine regional stock exchanges reacted to the three nuclear tests given their important security repercussions. The results, although not uniformed across all countries and markets, revealed a greater adverse effect in the case of the second of the three tests. Given that the first test was announced in advance and the third was conducted in the midst of an on-going military crisis, this finding suggests that following the initial shock an unanticipated event can cause, markets can evaluate and absorb in a more efficient manner the news. © 2014 by Walter de Gruyter Berlin/Boston.