From chaos to consensus: an event study on the Korean stock market

This study investigated the effects of political instability on stock market outcomes. We examined the effect of President Yoon Suk Yeol’s declaration of emergency martial law on South Korean stock market returns on December 3, 2024. The data cover the period from November 4, 2023, to December 12, 2024. We utilized an event study methodology for both mean-adjusted return and market models to calculate cumulative abnormal returns (CARs). Our results show that, on average, CARs ranged from −7.42 to −2.65 percent under the mean-adjusted return model and from −6.37 to −2.23 percent under the market model. This result suggests that the declaration of martial law had a significant negative effect on stock market returns. In addition, we examined the impact of the event on sector returns as well as on tercile portfolios formed by firm size. We found that sector returns react differently to the event. Under both the mean-adjusted return and market models the most negatively affected sector was the energy sector, whereas the least affected sector was the financial sector. In terms of market capitalization, under both models, the event affected the portfolios of small and medium-sized firms significantly and more negatively than those of large firms.