The Impact of Country Risk Ratings on Stock Market Performance: Evidence from The South Asian Region

  • Umar Sadaat

Student thesis: Doctoral ThesisDoctor of Philosophy


During the last three decades, the South Asian region has introduced several major financial reforms, such as the financial liberalisation programme and the formation of the South Asian Federation of Exchanges (SAFE), which has opened a new investment avenue for international investors. These major reforms have resulted in a significant increase in foreign capital into the region. As the South Asian region is developing in nature, it is susceptible to country risk, which consists of economic, political and financial risk (Diamonte et al., 1996). Thus, it is vital that investors, international portfolio managers and policy-makers understand how these stock markets react in response to country risk and its individual components. Surprisingly, the extant literature has largely ignored the impact of country risk on this region and has, instead, focused on regional blocs such as Brazil, Russia, India, China and South Africa (BRICS) or, more commonly, developed stock markets. This thesis fills this gap in the literature by investigating the impact of country risk on Bangladesh, India, Pakistan, and Sri Lanka (BIPS) stock markets.

The objectives of this thesis are threefold. First, the thesis examines the asymmetric short- and long-term impact of the three components of country risk ratings – economic, political and financial risk - on the BIPS stock markets of by employing the Nonlinear Autoregressive Distributed Lag (NARDL) model and using monthly data from January 1996 to August 2020. The results of this analysis indicate that the BIPS stock markets exhibit a degree of heterogeneity in response to changes in risk ratings. The stock markets in Bangladesh and Pakistan show special sensitivity to risk ratings, while the Indian and Sri Lankan stock markets are influenced mainly by global factors, such as the world market return.

Second, the thesis explores the asymmetric impact of the individual components of political risk ratings on BIPS stock markets. In particular, this part of the analysis seeks to identify the specific political risk factors that explain return variations in each of the BIPS stock markets. The results from this analysis suggest that the effects of individual components of political risk vary across the four markets, with conflicts and the role of the military in political matters being the common source of political risk that affects stock returns in the region.

Finally, this thesis employs the Generalised Autoregressive Conditional Heteroscedasticity – Mixed Data Sampling (GARCH-MIDAS) model to investigate the linkage between country risk ratings and stock market volatility. Specifically, the GARCH-MIDAS model was employed as it allows the linkage of high-frequency daily data with moderate frequency variables in order to examine directly the impact of country risk ratings on stock volatility. The results highlight that country risk ratings have a significant effect on return volatility in BIPS stock markets. In particular, the relationship between country risk ratings and volatility was significant for the entire sample period in Pakistan and Sri Lanka. Furthermore, the analysis of sub-sample periods indicates that stock volatility in India was mainly influenced by country risk ratings during the pre-global financial crisis (GFC) period, while stock volatility in Bangladesh was affected by economic and financial risk ratings. The coefficient signs were negative in the majority of cases, implying that there is a countercyclical pattern in stock market volatility.

Overall, the findings of this study have important practical implications for investors and policy-makers. Investors should use information relating to country risk ratings for investment decisions to enhance portfolio performance and mitigate risk. The results appear to have implications for policy-makers in these countries. A detailed analysis of the relationship between country risk ratings and stock market performance could assist in the development of policies that take account of the impact of country risk on these stock market - for example, the introduction of policies for economic and political stability, which are important factors for market development and for attracting international investors.
Date of Award2023
Original languageEnglish
SupervisorSuzanne Fifield (Supervisor) & Stavros Kourtzidis (Supervisor)


  • country risk

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