How Underlying Dimensions of Political Risk Affect Excess Return in Emerging and Developed Markets

Nesset, Ida Qvenild; Bøgeberg, Ingrid; Kjærland, Frode; Molden, Lars Hovdan

doi:10.1177/0972652719831540

Cited by 13 publications

(10 citation statements)

References 37 publications

(125 reference statements)

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“…They report that the International Country Risk Guide (ICRG) risk factors affect the returns of MSCI stock index returns for 64 markets, but the effect of each component differs by market category. More recently, Nesset et al (2019) analyze to what extent the dimensions of political risks affect excess returns differently across different types of market. The study identifies legal, tension, conflicts and political aspects as underlying dimensions of political risks for a sample of 28 emerging and developed countries covering the period June 2001 to May 2015.…”

Section: Related Literature and Hypothesesmentioning

confidence: 99%

“…The study identifies legal, tension, conflicts and political aspects as underlying dimensions of political risks for a sample of 28 emerging and developed countries covering the period June 2001 to May 2015. Nesset et al (2019) employ a principal component analysis using a disaggregated political risk index. Using a two-way error correction model, they identify ethnic and religious tension as a new and distinct dimension of political risks.…”

Section: Related Literature and Hypothesesmentioning

confidence: 99%

“…Nevertheless, the findings often violate the classic risk-return relationship, leading to the socalled political risk sign paradox. Actually, an increase in political risks is associated with lower stock returns (Diamonte et al , 1996; Perotti and van Oijen, 2001; Dimic et al , 2015; Lehkonen and Heimonen, 2015; Aroui et al , 2016; Nesset et al , 2019; Smales, 2020; Kirikkaleli, 2020). Our study complements the strand of literature examining the impact of political risks on stock markets in emerging and developed economies (Dimic et al , 2015; Nesset et al , 2019).…”

Section: Introductionmentioning

confidence: 99%

“…Actually, an increase in political risks is associated with lower stock returns (Diamonte et al , 1996; Perotti and van Oijen, 2001; Dimic et al , 2015; Lehkonen and Heimonen, 2015; Aroui et al , 2016; Nesset et al , 2019; Smales, 2020; Kirikkaleli, 2020). Our study complements the strand of literature examining the impact of political risks on stock markets in emerging and developed economies (Dimic et al , 2015; Nesset et al , 2019). First, we investigate how the political risk affects stock returns and volatility by employing a regression analysis with fixed country effects in order to address the endogeneity problem.…”

Section: Introductionmentioning

confidence: 99%

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Political risks and financial markets: emerging vs developed economies

Ghozzi

Chaibi

2021

EMJB

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PurposeThe authors provide a comparative analysis between emerging and developed financial markets in terms of the effects of political risks on stock market returns and volatility. The authors also examine whether this impact depends on the nature of political risks. Therefore, this study aims to detect which financial markets are the most profitable and the riskiest in terms of political risks.Design/methodology/approachThe authors investigate the impact of political risks on the excess stock market return and its conditional volatility using the generalized ARCH model for a sample of 46 developed and emerging markets over a period ranging from 1995 to 2019. In order to test how the nature of political risks affects equity excess returns and volatility differently in different markets, the authors employ (1) a composite political risk score, (2) the four subgroups of political risks as defined by Bekaert et al. (2005, 2014) and (3) the individual dimensions of political risks.FindingsThe findings indicate that the composite political risk is priced into both stock markets. The effect of political risks is positive for excess returns and negative for volatility. The authors show that the political risk leads to more volatility in developed markets. Nevertheless, the effect of individual components varies according to the market category.Practical implicationsThe authors provide a framework for predicting market returns and volatility using changes in the political risk of the country. The findings help investors make investment decisions based on the political decisions of governments. In other words, investors should consider political uncertainty when determining their expected earnings.Originality/valueThe authors engage monthly panel data methodology in terms of the political risk stock market relationship. In addition, the authors consider recent and very long data covering the period 1995–2019. Furthermore, this study combines three various political risk measures, and both equity returns and volatility.

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Section: Related Literature and Hypothesesmentioning

confidence: 99%

Section: Related Literature and Hypothesesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Political risks and financial markets: emerging vs developed economies

Ghozzi

Chaibi

2021

EMJB

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“…Since there is no clear cut on the best valuation method of stocks in emerging markets like Malaysia (Mansor, Rahahleh, and Bhatti, 2019), it is difficult to gauge the value of these stocks. The variation of the value of these stocks is largely due to the measurement of beta that lacks important economic, political and industrial information (Jenkins, 2012, Nesset, Bøgeberg, Kjaerland, andMolden, 2019).…”

Section: Introductionmentioning

confidence: 99%

Freedom Indices and Capital Asset Pricing Model: Some Malaysian Evidence

Lee

Rasiah

Lai

2020

IJOMFA

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Human rights and fundamental freedoms such as economic, political, and press freedoms vary widely from country to country. It creates opportunity and risk in investment decisions. Thus, this study is carried out to examine if the explanatory power of the model for capital asset pricing could be improved when these human rights movement indices are included in the model. The sample for this study comprises of 495 stocks listed in Bursa Malaysia, covering the sampling period from 2003 to 2013. The model applied in this study employed the pooled ordinary least square regression estimation. In addition, the robustness of the model is tested by using firm size as a controlled variable. The findings show that market beta as well as the economic and press freedom indices could explain the cross-sectional stock returns of the Malaysian stock market. By controlling the firm size, it adds marginally to the explanation of the extended CAP model which incorporated economic, political, and press freedom indices.

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Exchange rate volatility and India–US commodity trade: evidence of the third country effect

2023

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The relationship between trade flows and exchange rate uncertainty is still being debated in academic circles while examining the effects of exchange rate uncertainty on India's bilateral trade flows, prior research disregard the “third-county” effect. This study investigates the effect of third-country risk on the amount of India–US commodity trade using time series data for 79 Indian commodity export and 81 Indian commodity import businesses. The results show that the volume of trade in a select few industries is considerably impacted by third-country risk in terms of dollar/yen and rupee/yen. According to the findings, rupee–dollar volatility affects 15 exporting industries in the short run and 9 industries in the long run. Similarly, the third country effect demonstrates that Rupee–Yen volatility affects 9 Indian exporting industries both in the short and long run. The results show that rupee–dollar volatility tends to have a short-term impact on 25 importing industries and a long-term impact on 15 sectors. Similar to this, the third country effect demonstrates that Rupee–Yen volatility tends to have an impact on 9 Indian importing industries over the short and long term.

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How Underlying Dimensions of Political Risk Affect Excess Return in Emerging and Developed Markets

Cited by 13 publications

References 37 publications

Political risks and financial markets: emerging vs developed economies

Political risks and financial markets: emerging vs developed economies

Freedom Indices and Capital Asset Pricing Model: Some Malaysian Evidence

Exchange rate volatility and India–US commodity trade: evidence of the third country effect

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