Can Country Risk Rating, Economic Policy Uncertainty, Investor Sentiment and Oil Prices Forecast Emerging Markets Equity Returns?

This research analyzes the causal relationship between country risk rating, economic policy uncertainty (EPU), investor sentiment, oil prices and equity returns in several emerging markets over a decade. We use the nonlinear non-parametric Granger causality model and Vector Error Correction model to describe and investigate the causal correlation between country risk rating, economic policy uncertainty, oil prices, and investor sentiment and equity returns at the original level. We find Granger causal relationship-VECM with oil prices to predict stock returns in emerging markets and further research is suggested to investigate the usage of Credit Default Swap as country risk rating proxy to predict stock markets returns.