In the heart of Seoul, the bustling streets and towering skyscrapers of South Korea’s capital witnessed an unprecedented event on December 3, 2024. President Yoon Suk Yeol’s declaration of emergency martial law sent shockwaves through the nation, but the tremors were perhaps most keenly felt in the country’s stock market. A recent study, published in the journal ‘Cogent Economics & Finance’ (which translates to ‘Cogent Economics and Finance’), has shed light on the immediate and significant impact of this political upheaval on market returns, with particular repercussions for the energy sector.
The research, led by Abdullah M. Al-Awadhi from the College of Business Studies at the Public Authority for Applied Education and Training (PAAET) in Kuwait, employed an event study methodology to analyze the effects of the martial law declaration. By examining stock market data from November 4, 2023, to December 12, 2024, Al-Awadhi and his team calculated cumulative abnormal returns (CARs) using both mean-adjusted return and market models. The results were stark: the declaration of martial law had a significant negative effect on stock market returns, with CARs ranging 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.
For the energy sector, the impact was particularly severe. “The energy sector was the most negatively affected,” Al-Awadhi noted, highlighting the vulnerability of this industry to political instability. This finding underscores the delicate balance that energy companies must maintain in the face of geopolitical risks. As the sector grapples with the ongoing energy transition and the push towards renewable sources, political instability adds another layer of complexity.
The study also revealed that smaller and medium-sized firms were hit harder than their larger counterparts. This disparity suggests that market capitalization plays a crucial role in a company’s resilience to political shocks. Larger firms, with their deeper pockets and more diversified portfolios, may be better equipped to weather such storms.
So, what does this mean for the future of the South Korean stock market and the energy sector? The research by Al-Awadhi and his team underscores the need for robust risk management strategies, particularly in the energy sector. Companies may need to reassess their exposure to political risks and consider diversification strategies to mitigate potential losses. For investors, the findings serve as a cautionary tale, emphasizing the importance of due diligence and the need to stay informed about political developments.
Moreover, this study opens the door for further research into the long-term effects of political instability on market returns and sector-specific impacts. As South Korea continues to navigate its political landscape, understanding these dynamics will be crucial for stakeholders across the board.
The energy sector, in particular, may need to adapt its strategies to account for the heightened risks associated with political instability. This could involve investing in more resilient infrastructure, exploring new markets, or even advocating for policy changes that promote stability and predictability. As Al-Awadhi’s research shows, the stakes are high, and the need for proactive measures is clear.
In an increasingly interconnected world, the ripple effects of political instability can be far-reaching. The South Korean stock market’s reaction to the declaration of martial law serves as a reminder of the delicate interplay between politics and economics. As we move forward, it will be essential to build resilience and adaptability into our systems, ensuring that we are better prepared to face the challenges that lie ahead.