Does Policy Instability Matter for International Equity Markets?

42 Pages Posted: 13 Mar 2020 Last revised: 17 May 2020

See all articles by Swee Sum Lam

Swee Sum Lam

National University of Singapore - NUS Business School

Huiping Zhang

James Cook University - College of Business, Law and Governance,

Weina Zhang

Department of Finance, National University of Singapore; National University of Singapore Risk Management Institute

Multiple version iconThere are 2 versions of this paper

Date Written: March 2020

Abstract

We 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.

Suggested Citation

Lam, Swee Sum and Zhang, Huiping and Zhang, Weina, Does Policy Instability Matter for International Equity Markets? (March 2020). International Review of Finance, Vol. 20, Issue 1, pp. 155-196, 2020, Available at SSRN: https://ssrn.com/abstract=3553482 or http://dx.doi.org/10.1111/irfi.12222

Swee Sum Lam

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore
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Huiping Zhang

James Cook University - College of Business, Law and Governance, ( email )

Singapore
Singapore

Weina Zhang (Contact Author)

Department of Finance, National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
65168120 (Phone)
67792083 (Fax)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/108-weina

National University of Singapore Risk Management Institute ( email )

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Level 4
Singapore, 119613
Singapore

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