Stock Returns Under Political and Macroeconomic Instabilities: An Empirical Analysis from United Kingdom

Abstract

The main purpose of our paper is to empirically explore the effect of political and macroeconomic risk on stock returns. We constructed a multivariate model to explore behavior of stock returns under political risk and macroeconomic uncertainty. The annual panel data of our study consists of 23 manufacturing firms listed at London Stock Exchange for period covering 2005 to 2016. We utilized robust two-step system GMM to estimate the empirical model of the study. The findings showed significance of uncertainties for predicting the stock returns in the UK. Specifically, it showed statistical but differential significant impact of political risk and macroeconomic uncertainty on stock returns of the firms that are listed at FTSE-100 index. However, macroeconomic uncertainty showed higher statistical impact on the stock returns as compared to political risk. Our study provides guidance to policymakers and investors. It provides guidance for investors to know about the timings of entry and exit into stock markets and helps managers and policy makers in risk management.

Keywords: Stock returns, Political risk, Macroeconomic uncertainty, and Two-step System GMM.

JEL Codes: D22, G11.