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Does Country Risks Predict Stock Returns and Volatility? Evidence from a Nonparametric Approach

Author

Listed:
  • Tahir Suleman

    () (School of Economics and Finance, Victoria University of Wellington, New Zealand and School of Business, Wellington Institute of Technology, New Zealand)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa; IPAG Business School, Paris, France)

  • Mehmet Balcilar

    () (Department of Economics, Eastern Mediterranean University, Famagusta, via Mersin 10, Northern Cyprus,Turkey and Department of Economics, University of Pretoria, Pretoria, 0002, South Africa; IPAG Business School, Paris, France)

Abstract

We use the k-th order nonparametric causality test at monthly frequency over the period of 1984:1 to 2015:12 to analyze whether aggregate country risk, and its components (economic, financial and political) can predict movements in stock returns and volatility of eighty-three developed and developing economies. The nonparametric approach controls for the existing misspecification of a linear framework of causality, and hence, the weak evidence of causality obtained under the standard Granger tests cannot be relied upon. When we apply the nonparametric test, we find that, while there is no evidence of predictability of squared stock returns barring one case, at times, there are nearly 50 percent of the countries where the aggregate risks and its components tend to predict stock returns and realized volatility.

Suggested Citation

  • Tahir Suleman & Rangan Gupta & Mehmet Balcilar, 2016. "Does Country Risks Predict Stock Returns and Volatility? Evidence from a Nonparametric Approach," Working Papers 201675, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201675
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    References listed on IDEAS

    as
    1. Bilson, Christopher M. & Brailsford, Timothy J. & Hooper, Vincent C., 2002. "The explanatory power of political risk in emerging markets," International Review of Financial Analysis, Elsevier, vol. 11(1), pages 1-27.
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    More about this item

    Keywords

    Country risks; returns; volatility; nonparametric higher-order causality;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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