Published in:
International Review of Finance, 20 (2020) 1, Seite 155-196
Language:
English
DOI:
10.1111/irfi.12222
ISSN:
1369-412X;
1468-2443
Origination:
Footnote:
Description:
AbstractWe 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.