The Impact of A Country's Financial, Economic, and Political Risk on the its Creditworthiness and Stock Market Development: Cross Sectional Analysis

Abstract

This paper examines, empirically, the relationship between a country's financial, economic, and political risk on its creditworthiness in Market-Based and Economic-Based financial systems. It also investigates the effect of country risk on stock market development in 41 countries, split into 17 Market-Based and 24 Bank-Based financial systems. Results show a higher effect of political and economic risk on creditworthiness in Bank-Based than in Market-Based financial systems. In addition, results show that stock markets in countries with low financial, economic, and political risk are more developed and have higher creditworthiness than countries with high political and economic risk (more significant than financial risk). Also, results demonstrate lower stock market development and higher creditworthiness in Bank-Based than Market-Based financial systems.