The role of Political Risk

Does privatization in emerging economies have a significant indirect effect on local stock market development through the resolution of political risk? It is suggested that a sustained privatization program represents a major political test that gradually resolves uncertainty over political commitment to a market oriented policy as well as to regulatory and private property rights. Evidence has been suggested that progress in privatization is correlated with improvements in perceived political risk and that these improvements are significantly larger in privatizing countries than in non-privatizing countries, indicating that the resolution of such risk is endogenous to the privatization process. Further research shows that changes in political risk in general tend to have a strong effect on local stock market development and excess return in emerging economies, also suggesting that political risk has a price factor. The resolution of political risk resulting from successful privati...