Does country risks predict stock returns and volatility? Evidence from a nonparametric approach
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Date
Authors
Suleman, Tahir
Gupta, Rangan
Balcilar, Mehmet
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
We use the k-th order nonparametric causality test at monthly frequency over the period of 1984:1–2015:12 to analyze whether aggregate country risk, and its components (economic, financial and political) can predict movements in stock returns and volatility of eighty-three developed and developing economies. The nonparametric approach controls for the existing misspecification of a linear framework of causality, and hence, the weak evidence of causality obtained under the standard Granger tests cannot be relied upon. When we apply the nonparametric test, we find that, while there is no evidence of predictability of squared stock returns barring one case, at times, there are nearly 50 percent of the countries where the aggregate risks and its components tend to predict stock returns and realized volatility.
Description
Keywords
Country risks, Returns, Volatility, Nonparametric higher-order causality
Sustainable Development Goals
Citation
Suleman, T., Gupta, R. & Balcilar, M. 2017, 'Does country risks predict stock returns and volatility? Evidence from a nonparametric approach', Research in International Business and Finance, vol. 42, pp. 1173-1195.