The Effect Of The THAAD Incidents On The Chinese And South Korean Stock Markets

This paper investigates the impacts of sentiments caused by interstate disputes on stock markets by examining a political conflict between China and South Korea about the deployment of a geostrategic defense weapon,called THAAD.We examine two events:the THAAD deployment announcement and the deployment location-reveal announcement.We find that Chinese companies with great export exposure to South Korea suffer great declines during the examined events.The effect is more pronounced for Chinese companies that operate in regions that react more sensitive to the events,as well as for companies that operate in regions that are tied strongly to South Korea,economically and culturally.We also find that South Korean companies,which are export exposed to China,experience a stock price decline during the event days.Finally,a long term firm value analysis shows that Chinese high export exposed companies don't have a long-term decline,while South Korean companies with high export exposure to China suffer a persistent drop.We therefore conclude that the sentiments caused by political conflicts result in stock price declines on the Chinese stock market and lead to a boycott effect for South Korean companies.