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This article examines how investors react to nuclear threats from North Korea on the South Korean stock market. To investigate the differences in investor groups’ responses, we divide investors into three groups: domestic individual, domestic institution and foreign investors. In addition, we classify the nuclear threats into the one actual threat and the seven verbal threats and compare trading activities of investors against those in the peaceful period of 2004. The net-buying and LSV(1992) herding measures are applied to examine investors’ trading behavior. Our results show that it was only for the case of the actual threat that investors’ trades significantly differed with the peaceful period. In addition, our results show that the three investor groups reacted to the actual nuclear threat differently. When the actual nuclear threat occurred, individuals sold, institutes and foreigners bought stocks. Like in the peaceful period, institutes showed a positive slope for lagged returns whereas individuals displayed a negative slope. Foreigners, however, bought regardless of previous returns. Moreover, LSV herding measure increased in all investor groups.

How do Investors in the Korean Stock Market React to Nuclear Threats from North Korea?