Impact of Political Risk on Frontier Capital Market

In this paper the impact of political risk on the movement of stock prices in the capital market of the Republic of Serbia is analysed. This is the market with a short history of trading, characterized by a high degree of volatility, with frequent and high jumps in prices. In addition, it is a very narrow and depth lacking market dominated by share trading in that period; the market where the trading in neither treasury, nor corporate bonds was well-developed. All stipulated above indicates a high degree of correlation between the stock price and the current local political events, with the exception of the financial crisis as a global factor. Serbian political shocks are frequent, unpredictable and well defined, which allows us to clearly identify political risk. We have identified the dates/periods when certain jumps in the volatility of the market index return happened, which were then brought into connection with the occurrence of appropriate political news. In that way we were able to quantify the effects of political events on the volatility of return. This is the first paper that deals with the impact of political risk on stock returns in Serbia. Additionally, it is shown that Serbia's score of political risk in December 2009 was the highest in the Eastern Europe region. In 2015 it is around regional Balkan's average, and it lies between Albanian and Macedonian score of political risk index.