Global political risk and international stock returns

Vito D. Gala, Giovanni Pagliardi and Stavros Zenios

Journal of Empirical Finance, 2023, vol. 72, issue C, 78-102

Abstract: Using novel measures of politics-policy uncertainty we document predictable variation in stock market returns across countries. Country characteristics and existing global and local risk factors do not account for such predictability, leading to large abnormal returns up to 15% per annum. We identify a global political risk factor (P-factor) commanding a risk premium of 11% per annum. High political uncertainty countries covary positively with the P-factor, earning higher average returns. Augmenting the global market portfolio with the P-factor significantly reduces pricing errors and improves cross-sectional fit. Politics-policy uncertainty affects returns through both cash-flow and discount rate channels.

Keywords: Political uncertainty; Policy uncertainty; International equities; Asset pricing (search for similar items in EconPapers)
JEL-codes: E62 F30 G15 G18 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:72:y:2023:i:c:p:78-102

DOI: 10.1016/j.jempfin.2023.03.004

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