Market reactions to political uncertainty: evidence from Taiwan accidentally fires Missile towards Mainland China

ABSTRACT

This letter examines the impact of political uncertainty on stock prices by utilizing a quasi-experiment, i.e. Taiwan accidentally fires a missile towards mainland China. As this missile accident was entirely unforeseen by investors in the market, it provided a complete exogenous shock causing political uncertainty. We find that the political uncertainty caused by the events has significant negative effects on stock prices, especially for firms that have economic and geographical connections with Taiwan or are adjacent to Taiwan.

KEYWORDS:

• Political uncertainty
• stock price
• missile accident
• political connection

JEL CLASSIFICATION:

• G14
• D81

Disclosure statement

No potential conflict of interest was reported by the author(s).

Code availability

Custom code; code used during the study are available from the corresponding author by request.

Some or all data, models, or code generated or used during the study are available from the corresponding author by request. (eg. Economic connection).

Authors’ contributions

Yitong Liu contributed significantly to data collection; Beibei Shi performed the data analyses and wrote the manuscript; Yunbiao Ma helped perform the analysis with constructive discussions.

Notes

¹ Our results are robust to dropping this requirement.

² The investment ratio is equal to Taiwan’s investment in each province divided by the total investment in mainland China during 1991–2015.

³ We also use CAR(0,+5) and CAR(0,+10) to run our regression, the conclusions are the same.

⁴ Due to space constraints, we only use Relation to measure economic connections and conduct relevant test in Table 2. The results keep the same when we use Investratio to measure economic connections.

Additional information

Funding

This study is supported by the Fundamental Research Funds for the Central Universities” in UIBE(CXTD12-03); the China National Natural Science Foundation [71802049]; MOE (Ministry of Education in China) Project of Humanities and Social Sciences [20YJC630101].