Abstract:

The relation between asset returns and country risk is an important issue for international investors seeking diversification opportunities in emerging markets, particularly in South Africa. This paper aims to evaluate the impact of economic, financial and political components of country risk on stock and bond returns. A non-linear autoregressive distributed lag (NARDL) model was used to analyse the time-varying dynamic relationship between the country risk components and the two financial asset markets for a sample of 15 years monthly data. We found an asymmetric relationship between country risk and asset returns of the two markets. Political risk has long-run and short-run implications on stock and bond returns, while economic risk only has short-run effects on bond returns. These results suggest that international investors should carefully consider different components of country risk when seeking diversification opportunities.

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