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Volume 68, Issue 4

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Country Risk and Expected Returns Across Global Equity Markets

Zaremba, Adam

Year: 2018   Volume: 68   Issue: 4   Pages: 374-398

Abstract: Assessing and pricing country risk poses a considerable challenge to tactical asset allocation across national equity markets. This research examines the relationship between the country composite risk (together with its component risks related to sovereign credit, currency, banking sector, economic structure, and political situation) and expected returns, also identifying general implications for international investors. An equal-weighted portfolio of risky countries outperforms safe countries by approximately 0.50 percentage points per month. The application of this cross-sectional pattern, however, still poses a significant challenge for investment practice. The abnormal performance proves insignificant for capitalization-weighted and liquidity-weighted portfolios as well as within the subgroups of the full sample. Also, we observe that the profitability of the risk-based strategies has disappeared in the years following the global financial crisis.

JEL classification: G11, G12, G15

Keywords: country risk, sovereign risk, political risk, currency risk, banking sector risk, economic risk, country asset allocation, country selection strategies, return predictability, international asset pricing, cross-section of returns, international diversific

RePEc: https://ideas.repec.org/a/fau/fauart/v68y2018i4p374-398.html

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