Geopolitical risk and long-term stock market volatility: evidence from the Korean Peninsula using a GJR-GARCH-MIDAS framework

This study uses the GJR-GARCH-MIDAS model to empirically analyse the impact of Geopolitical Risk from North Korea (GPRNK) on the long-term volatility of South Korea’s KOSPI stock market. The estimation results based on daily returns and monthly GPRNK indicators indicate that realized volatility (RV) has a significant positive impact on long-term volatility. In contrast, GPRNK has a significant negative effect on long-term volatility. This result suggests that, in the context of frequent exposure to geopolitical risk (GPR), investors tend to adopt more conservative trading strategies, thereby reducing market volatility. Further analysis reveals that incorporating GPRNK into the model significantly enhances the predictive performance of long-term volatility, with a maximum predicted loss reduction of 4.2%. In summary, GPRNK has played a significant role in shaping the volatility characteristics of the South Korean stock market, providing valuable empirical evidence for improving long-term volatility forecasts.