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Growing Pains: International Instability and Equity Market Returns
Author(s) -
Chen Zhuo,
Lu Andrea Y.,
Yang Zhuqing
Publication year - 2017
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12165
Subject(s) - political instability , equity (law) , economics , emerging markets , capital asset pricing model , financial economics , political risk , monetary economics , economic stability , politics , macroeconomics , political science , law
We use the ratio of growth in global military expenditures to gross domestic product (GDP) to capture ex ante expectations of political instability and explore the relation between this measure and returns. In a standard global asset pricing framework with 44 countries, this measure helps to explain cross‐country return differences. Furthermore, emerging countries have greater exposure to international political instability risk than developed countries. This partially explains the higher returns observed in emerging countries.