Does Country Risks Predict Stock Returns and Volatility? Evidence from a Nonparametric Approach

Tahir Suleman (), Rangan Gupta and Mehmet Balcilar

No 201675, Working Papers from University of Pretoria, Department of Economics

Abstract: We use the k-th order nonparametric causality test at monthly frequency over the period of 1984:1 to 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.

Keywords: Country risks; returns; volatility; nonparametric higher-order causality (search for similar items in EconPapers)
JEL-codes: C22 G10 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-10
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

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Journal Article: Does country risks predict stock returns and volatility? Evidence from a nonparametric approach (2017)
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