How do the investors in the Korean stock market react to the nuclear threats from North Korea?

Abstract

On October 9th, 2006, North Korea conducted a nuclear test. We examine the impact of the nuclear threat from North Korea on the South Korean stock market. We divide investors into three groups, domestic individual, domestic institution and foreign investors. We use the net-buying and LSV(1992) herding measure to observe positive feedback trading and herding behavior of the groups. We find that the three investor groups reacted to the nuclear threats differently. When the event occurred, individuals sold, institutes and foreigners bought stocks. Institutes(individuals) still had positive(negative) slope to lagged return but foreigners`` slope almost disappeared although they tended to buy. LSV herding measure increased all the cases. Moreover, LSV herding measure increased all the cases. Especially, it seems that there were some herding behaviors by institutes and foreigners in the negative 30 minute lagged return part.