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How Underlying Dimensions of Political Risk Affect Excess Return in Emerging and Developed Markets

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  • Ida Q. Nesset
  • Ingrid Bøgeberg
  • Frode Kjærland
  • Lars H. Molden

Abstract

Political risk is expected to increase due to emerging markets’ increasing influence on the world economy. We identify legal, tension, conflict and policy as underlying dimensions through principal component analysis by using a disaggregated political risk index. Using a two-way error correction model, ethnic and religious tension is identified as a new and distinct dimension of political risk. Consequently, global investors are likely to benefit from understanding which dimension implies a reward. Investors in particular should direct their attention towards tension, which seems to command a risk premium regardless of both market and time. JEL Classification: C33, F30, F50, G15

Suggested Citation

  • Ida Q. Nesset & Ingrid Bøgeberg & Frode Kjærland & Lars H. Molden, 2019. "How Underlying Dimensions of Political Risk Affect Excess Return in Emerging and Developed Markets," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(1), pages 80-105, April.
    • Handle: RePEc:sae:emffin:v:18:y:2019:i:1:p:80-105
    DOI: 10.1177/0972652719831540
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    More about this item

    Keywords

    Political risk; emerging markets; principal component analysis; ethnic tensions; religious tensions;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F30 - International Economics - - International Finance - - - General
    • F50 - International Economics - - International Relations, National Security, and International Political Economy - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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