Is firm-level political risk priced in the corporate bond market?

Luis Ceballos, Vanja Piljak and Laurens Swinkels

Journal of Empirical Finance, 2024, vol. 79, issue C

Abstract: We investigate whether political risk is priced in the cross-section of corporate bond returns by using a text-based measure of firm-level political risk. We document a positive and significant political risk premium after controlling for bond and firm characteristics, conventional risk factors, and exposure to aggregate economic policy uncertainty. Bonds with higher political and credit risk, as well as smaller, more illiquid, and longer maturity corporate bonds exhibit a larger political risk premium. Time-series analysis indicates that monetary policy shocks and common shocks in the equity and bond market exhibit a statistically significant and positive association with the political risk premium. Our findings reveal the importance of idiosyncratic political risk beyond common risk factors and aggregate economic policy uncertainty.

Keywords: Bonds; Corporate bonds; Fixed income; Political risk (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:79:y:2024:i:c:s0927539824000963

DOI: 10.1016/j.jempfin.2024.101562

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