Expert Political Risk Opinions and Banking System Returns: A Revised International Banking Market Model
32 Pages Posted: 8 Feb 2006
Date Written: November 2005
This paper posits that human behaviour in banking and financial systems is made up of a complex mix of political, social and cultural factors reflected in expert opinion based political risk scores. Market inefficiency is partly a result of anomalies in human behaviour causing information asymmetries, where prices do not instantaneously reflect all available public and private information. The feasibility of re-specification of a basic systemic international banking market model is proposed, using the examples of developed and developing banking systems, on the basis that political risk factors and world banking returns are exogenous in country-banking system returns models. If political risk scores are exogenous in such models, the ratings will provide new information, which will be incorporated into and assist in explaining banking system stock returns for investors and banking regulators. For example, the model would help explain whether political risk ratings lead or lag financial crises.
Keywords: Political risk, international banking market model, exogeneity, and risks scores
JEL Classification: F36
Suggested Citation: Suggested Citation