Should we be more scared of North Korea after their recent nuclear tests? Kim Byung-Yeon and Gerard Roland say “No”!  They study the impact of major events related to North Korea (e.g.  the conduct of the nuclear test in 2006) on South Korean financial markets and conclude:

“We found basically no effects on financial markets of events perceived as increasing the tension on the Korean peninsula. In a nutshell, the financial markets in South Korea are not afraid of Kim Jong-Il.”

They use “event study methodology” which is typically used in finance to study mergers.  Prices before and after the merger are used to estimate its impact on value.  The key is getting the date of the event right.  If you get it too late for example, the price already incorporates the event.  For example, if the South Korean markets had already incorporated the “news” of the North Korean test, they would not react significantly to the actual test.  Not sure how the authors deal with this issue.  In any case, their approach is a highly original attempt to apply economic methods to foreign policy.