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Liberalization, Political Risk and Stock Market Returns in Emerging Markets

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  • Jean-François L'Her
  • Jean-Marc Suret

Abstract

In this paper, we analyze hyper-return periods from 1976 to 1994 for 20 emerging stock markets. We define a hyper-return period as a calendar year during which a cumulative geometric return in excess of 70% is observed. According to this definition, the hyper-return periods represent 23% of the 279 country-year observations examined. First, a logistic model incorporating contemporary macroeconomic variables, market liberalization steps and political risk changes is used to explain hyper-return periods. Hyper-return periods are shown to be associated with political risk changes and with liberalization steps, whereas their relationship with changes in macroeconomic conditions is shown to be weak. Second, when a predictive model where aggregate price-to-earnings and book-to-market ratios and macroeconomic variables are used in addition to changes in political risk and liberalization steps, the latter variables play a predominant role. Cet article propose une analyse des périodes d'hyper-rendement des marchés boursiers émergents, de 1976 à 1994 et porte sur 20 pays. Une année dite d'hyper-rendement survient lorsque, au cours de cette année, il est possible d'observer une période durant laquelle le rendement cumulé de l'indice boursier dépasse 70 %. 23 % des 279 années/pays étudiées correspondent à cette définition. Un modèle logistique incorpore des indicateurs macroéconomiques contemporains, des indicateurs du processus de libéralisation des marchés boursiers et les variations du niveau de risque politique. Les périodes d'hyper-rendement sont associées de façon significative aux variations de risque politique et aux épisodes de libéralisation,0501s les relations avec les changements de conditions économiques sont faibles. Un modèle prédictif est également testé, qui incorpore des mesures agrégées des ratios cours/bénéfice et valeur comptable/valeur marchande, en plus des variations futures des conditions économiques. Dans ce cas également, les variations contemporaines de risque politique et les épisodes de libéralisation jouent un rôle prédominant.

Suggested Citation

  • Jean-François L'Her & Jean-Marc Suret, 1997. "Liberalization, Political Risk and Stock Market Returns in Emerging Markets," CIRANO Working Papers 97s-15, CIRANO.
    • Handle: RePEc:cir:cirwor:97s-15
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    File URL: https://cirano.qc.ca/files/publications/97s-15.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Emerging Markets; Stock Markets; Political Risk; Liberalization; Marchés émergents; marchés boursiers; risque politique; libéralisation;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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