Growing Pains: International Instability and Equity Market Returns

47 Pages Posted: 2 May 2012 Last revised: 27 Sep 2016

See all articles by Zhuo Chen

Zhuo Chen

Tsinghua University; Tsinghua University - PBC School of Finance

Andrea Lu

The University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Clair Yang

University of Washington - Henry. M. Jackson School of International Studies

Date Written: September 20, 2016

Abstract

We exploit a unique dataset of country-specific military expenditures and construct a proxy for international instability, measured as the growth of the global military expenditure to GDP ratio, to capture political tensions and international conflicts. Using the market indices of 44 countries, we find that the international political instability is a valid pricing factor. Our factor helps explain the cross-country return differences, complementary to existing global asset pricing models. Further, emerging countries have higher exposures to the international political instability risk than developed countries. Such higher exposures contribute to the higher returns observed in emerging countries.

Keywords: Asset Pricing, International Political Instability, Militarization

JEL Classification: F50, G12, G15, H56

Suggested Citation

Chen, Zhuo and Lu, Andrea Y. and Yang, Clair, Growing Pains: International Instability and Equity Market Returns (September 20, 2016). PBCSF-NIFR Research Paper No. 12-02. Available at SSRN: https://ssrn.com/abstract=2050005 or http://dx.doi.org/10.2139/ssrn.2050005

Zhuo Chen

Tsinghua University ( email )

43 Chengfu Road
Beijing, 100083
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Andrea Y. Lu (Contact Author)

The University of Melbourne - Department of Finance ( email )

Level 12, 198 Berkeley Street
Parkville, Victoria 3010 3010
Australia
+61383443326 (Phone)
+61383446914 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Clair Yang

University of Washington - Henry. M. Jackson School of International Studies ( email )

400 Thomson Hall
Seattle, WA 98195
United States

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