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Saturday, November 27, 2010

A peculiar resiliency of markets to geopolitical crises

One of the interesting sub-plots of the ongoing crisis between North and South Korea is that it's had a comparatively small effect on South Korean stock markets. 

Sure, markets have sold off a little bit, but considering the prospect of a potentially ruinous war, markets have been taking it all in stride. Then again, if you look back to the Cuban Missile Crisis in 1962, our markets did not sell off much. The Dow fell from about 586 to about 569 during the crisis. That's a fairly puny decline of around 3%. As a point of fact, it's hard to make the argument that a decline that small was even caused by the crisis. 

When you compare it to the vast overreaction to 9/11 or the sell-off preceding the Iraq War, which had very little economic effect, such reactions are puzzling, but it seems that markets don't sell off much on the low probability of disastrous events and sell off drastically on the high probability or the occurrence of relatively minor events. 

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