Behavioral Biases in the Korean Foreign Exchange Market during the COVID-19 Recession

Purpose – This study investigates whether the Korean foreign exchange market exhibited behavioral biases in its response to economic and financial news during the COVID-19 recession. Drawing on insights from behavioral and neurofinance, it focuses on potential asymmetry in market reactions to good and bad news, as well as the influence of market sentiment and momentum. Using an event-study framework and a newly constructed dataset of domestic and international news, the analysis estimates abnormal movements in the KRW/USD exchange rate to identify deviations from rational expectations, and to assess the extent to which behavioral factors shaped exchange rate dynamics during the pandemic. Design/Methodology – This study employs an event-study methodology to examine the impact of economic and financial news on movements in the KRW/USD exchange rate during the COVID-19 recession. A new daily dataset of domestic and international news is constructed and systematically classified into good and bad news, as well as hard and soft information categories. Abnormal changes in the exchange rate are estimated using a market model adjusted by a global foreign exchange index, enabling the analysis to isolate the effects of specific news events. In addition, the empirical framework incorporates measures of market momentum to assess whether exchange rate responses vary under optimistic and pessimistic market conditions. Findings –The main findings can be summarized as follows. First, the Korean foreign exchange market responded more strongly to bad news than to good news during the COVID-19 recession, indicating asymmetric information processing under crisis conditions. Second, although market sentiment and momentum influence the direction of exchange rate movements, differences in responses across optimistic and pessimistic periods are generally small and not statistically significant. Finally, the market does not systematically assign greater importance to soft news relative to hard news, suggesting that while behavioral biases are present, they remain moderate rather than dominant in shaping exchange rate dynamics during the pandemic. Originality/Value – Existing research on foreign exchange markets during crisis periods has largely focused on market efficiency and policy responses, often assuming fully rational investor behavior. This study contributes to the literature by analyzing exchange rate dynamics from a behavioral finance perspective, explicitly examining asymmetric responses to news, the role of market sentiment, and differences across information types during the COVID-19 recession. By constructing a new hand collected dataset of domestic and international news and applying an event-study framework to the Korean foreign exchange market, this paper provides novel empirical evidence on both the presence and the limited extent of behavioral biases in currency markets during a global health crisis, which remains relatively underexplored in existing research.