Growing Pains: International Instability and Equity Market Returns
47 Pages Posted: 2 May 2012 Last revised: 27 Sep 2016
Date Written: September 20, 2016
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: Suggested Citation