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The Impact of Political Risk on Equity Market Performance

Tolstova, Elina LU and Kapolková, Jana LU (2015) NEKN02 20151
Department of Economics
Abstract
This paper investigates the impact of political risk on financial performance. In order to assess the quantitative measure of political risk principal component analysis is performed referring to six indicators, which measure different areas of political environment. We employ several macroeconomic factors as control variables to strenghten the explanatory power of estimation. Panel data methods are used to test the impact of political risk. It turns out that political risk is not priced in equity returns, while results are sensitive to the time span changes. We show that the impact on price-to-earnings ratio is negative and statistically significant implying that investors are willing to pay less for stocks with higher risk. Dividend... (More)
This paper investigates the impact of political risk on financial performance. In order to assess the quantitative measure of political risk principal component analysis is performed referring to six indicators, which measure different areas of political environment. We employ several macroeconomic factors as control variables to strenghten the explanatory power of estimation. Panel data methods are used to test the impact of political risk. It turns out that political risk is not priced in equity returns, while results are sensitive to the time span changes. We show that the impact on price-to-earnings ratio is negative and statistically significant implying that investors are willing to pay less for stocks with higher risk. Dividend yields respond positively, but the regression has weak explanatory power. Among macroeconomic variables, GDP turns to have a significant influence on all the financial performance measures. Additionally, the effects of unemployment, exchange rate movements, interest rates and reserves on returns are statistically significant. To conclude, the paper demonstrates the existence of the impact of political risk proxies and various macroeconomic indicators on equity market performance. (Less)
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author
Tolstova, Elina LU and Kapolková, Jana LU
supervisor
organization
course
NEKN02 20151
year
type
H1 - Master's Degree (One Year)
subject
keywords
political risk, stock market, returns, price-to-earnings ratio, dividend yield, macroeconomic factors, panel regression
language
English
id
5465014
date added to LUP
2015-06-29 13:23:11
date last changed
2015-06-29 13:23:11
@misc{5465014,
  abstract     = {This paper investigates the impact of political risk on financial performance. In order to assess the quantitative measure of political risk principal component analysis is performed referring to six indicators, which measure different areas of political environment. We employ several macroeconomic factors as control variables to strenghten the explanatory power of estimation. Panel data methods are used to test the impact of political risk. It turns out that political risk is not priced in equity returns, while results are sensitive to the time span changes. We show that the impact on price-to-earnings ratio is negative and statistically significant implying that investors are willing to pay less for stocks with higher risk. Dividend yields respond positively, but the regression has weak explanatory power. Among macroeconomic variables, GDP turns to have a significant influence on all the financial performance measures. Additionally, the effects of unemployment, exchange rate movements, interest rates and reserves on returns are statistically significant. To conclude, the paper demonstrates the existence of the impact of political risk proxies and various macroeconomic indicators on equity market performance.},
  author       = {Tolstova, Elina and Kapolková, Jana},
  keyword      = {political risk,stock market,returns,price-to-earnings ratio,dividend yield,macroeconomic factors,panel regression},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Impact of Political Risk on Equity Market Performance},
  year         = {2015},
}