Country Risk and Volatility of Stock Returns: Panel-GARCH Evidence for Latin America

Abstract

This paper studies the link between Country Risk – measured by a country Composite Risk index as well as individual measures of Economic, Financial and Political Risk – and Volatility of Stock Market returns. We use monthly data for eight Latin American countries, over the period January 1993 to December 2013 and model Stock return volatility as a panel-GARCH process. We find significant and persistent volatility patterns for Stock market returns as well as significant and generally positive cross-correlation among different Stock markets. We also find strong support for the hypothesis that higher Country Risk increases Stock market volatility in this region.

Keywords: Country risk, stock market volatility, panel-GARCH models

JEL Classification: C23, F00, G15