Growing Pains: International Instability and Equity Market Returns
Z Chen, AY Lu, Z Yang
FINANCIAL MANAGEMENT | WILEY | Published : 2017
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.