The Value of Institutions for Financial Markets: Evidence from Emerging Markets

Thomas Stratmann () and Bernardin Akitoby

No 09/27, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the value of political institutions for financial markets, using panel data from emerging market countries. We test the hypothesis that changes in political institutions, such as improvements in democratic rights and increased government accountability, have a direct effect on sovereign interest rate spreads. We find that financial markets value institutions over and above the economic and fiscal outcomes these institutions shape. Democracy and accountability generally lower sovereign spreads, political risk tends to increase them, and financial markets tend to view election years negatively.

Keywords: Capital markets; Financial sector; Political economy; Governance; Social policy; Emerging markets; Cross country analysis; Economic models (search for similar items in EconPapers)
Date: 2009-02-12
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