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Hurting without hitting: The economic cost of political tension

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  • He, Yinghua
  • Nielsson, Ulf
  • Wang, Yonglei

Abstract

Political tension that causes diplomatic strain rarely escalates into direct violence or war. This paper identifies the economic effects of such non-violent political tension by examining Taiwan’s sovereignty debate. Non-violent events harming the relationship with mainland China lead to an average daily drop of 200 basis points in Taiwanese stock returns. The impact is more severe on firms openly supporting the Taiwanese pro-independence party. Through a series of tests, we show that this economic penalty is targeted at pro-independence firms that are economically exposed to mainland China via either investments or exports.

Suggested Citation

  • He, Yinghua & Nielsson, Ulf & Wang, Yonglei, 2017. "Hurting without hitting: The economic cost of political tension," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 106-124.
  • Handle: RePEc:eee:intfin:v:51:y:2017:i:c:p:106-124 DOI: 10.1016/j.intfin.2017.08.011
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    Cited by:

    1. Fuchs, Andreas, 2016. "China’s Economic Diplomacy and the Politics-Trade Nexus," Working Papers 0609, University of Heidelberg, Department of Economics.

    More about this item

    Keywords

    Political tension; Political connections; China; Taiwan;

    JEL classification:

    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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