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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 causing diplomatic strains 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 identify this economic penalty as initiated by mainland authorities, who specifically target political opponents that are economically exposed to mainland China via either investments or exports.

Suggested Citation

  • He, Yinghua & Nielsson, Ulf & Wang, Yonglei, 2014. "Hurting without Hitting: The Economic Cost of Political Tension," TSE Working Papers 14-484, Toulouse School of Economics (TSE), revised Jul 2015.
  • Handle: RePEc:tse:wpaper:28077
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    References listed on IDEAS

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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

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