Asia, in particular East Asia and the South China Sea, is one of the regions that are particularly exposed to geopolitical risk. We study the impact of an increased presence of the U.S. military in Asia on asset prices and capital inflows in the region. For that purpose, we construct a novel index from local newspapers reporting on the presence of U.S. Carrier Strike Groups in the region and estimate the market impact of a surprise change in this index. Our findings reveal that a higher military presence causes an increase in stock prices, an appreciation of the local currency, and an inflow of foreign capital, but also a higher level of geopolitical risk. Interestingly, during the first Trump administration, some effects change the sign. We also distinguish between newspapers reporting on the deployments of U.S. aircraft carriers related to tensions with North Korea and those related to tensions with China.
Here are the impulse response functions for variables associated with Korea and Taiwan.
Note that FX is defined so down is an appreciation of the local currency. CSG = “carrier strike group”.
Hence, the stock market, currency and equity inflows respond significantly to unexpected appearances of CSGs. In contrast, no such effect is found for China.
As an aside, here are CSG and ARG deployments as of 6 January 2025:
Source: USNI, accessed 1/11/2025.
DoD’s annual report on Military and Security Developments involving the PRC is here.