An Exploration Of: How Political Risk Components Affect The Stock Return And Volatility Considering Different Countries Of Varying Economic Development.

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Five main components of political risk were extracted from the International Country Risk Guide (ICRG) Rating model, this paper researches the elements: Government Stability, Socioeconomic Conditions, Investment Profile, Internal Conflict and External Conflict. We have chosen four countries to examine: the United Kingdom, Mexico, China and Iran from different economic worlds. We would like to investigate the relative importance of political risk factors on volatility and stock market returns. In addition we aim to explore the influence of each factor on stock market returns and volatility, in order to highlight the areas of importance for investors when making investment decisions and the government when making political decisions. Considering both qualitative and quantitative issues within the investigation, it is found that less economically developed countries are likely to be more exposed to political risks than its developed counterpart and individual countries have different influential factors from political risk. Moreover each stock market is influenced by a unique series of political factors, with very little overlap between each market in terms of relevant variables.

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