Country Risk and Expected Returns across Global Equity Markets

40 Pages Posted: 12 May 2016 Last revised: 2 Dec 2016

See all articles by Adam Zaremba

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business

Date Written: December 1, 2016


Assessing and pricing country risk poses a considerable challenge to tactical asset allocation across national equity markets. This research examines the relationship between the country composite risk (together with its component risks related to: sovereign credit, currency, banking sector, economic structure, and political situation) and the expected returns, also identifying general investment practice implications. The equal-weighted portfolio of risky countries proved to outperform the safe countries by approximately 0.50 percentage points per month. The application of this cross-sectional pattern, however, still poses a significant challenge for investment practice. The abnormal performance proved insignificant for capitalization-weighted and liquidity weighted portfolios, as well as within the subgroups of the full sample. We also observed profitability of the risk-based strategies disappear in the years following the global financial crisis.

Keywords: Country Risk; Sovereign Risk; Political Risk; Currency Risk; Banking Sector Risk; Economic Risk; Country Asset Allocation; Country Selection Strategies; Return Predictability; International Asset Pricing; Cross-Section of Returns; International Diversification

JEL Classification: G11, G12, G15

Suggested Citation

Zaremba, Adam, Country Risk and Expected Returns across Global Equity Markets (December 1, 2016). Available at SSRN: or

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875


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