Does policy instability matter for international equity markets?
Journal Publication ResearchOnline@JCUAbstract
We test whether policy risk is systematically priced in equity returns across 49 countries from 1995 to 2013. We construct two global policy risk factors based on the ratings from international country risk guide. They capture the policy risk from government instability (GOVLMH) and the quality of bureaucracy (BURLMH). Both factors are significantly and positively related to equity returns and the BURLMH factor carries a monthly risk premium of 65 basis points. A country with weaker economic and institutional conditions has more risk exposure to the BURLMH factor whereas a country with high democracy has more risk exposure to the GOVLMH factor. Overall, our study reveals the importance and complexity of policy risk in international equity markets.
Journal
International Review of Finance
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Volume
20
ISBN/ISSN
1468-2443
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Issue
1
Pages Count
42
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Publisher
Wiley
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Publisher Location
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Date
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EISSN
N/A
DOI
10.1111/irfi.12222