Political risk spreads

By Geert Bekaert, Campbell R. Harvey, Christian Lundblad, Stephan Siegel. Journal of International Business Studies, 2014

240 citations recorded by the source corpus.

We introduce a new, market-based and forward-looking measure of political risk derived from the yield spread between a country’s US dollar debt and an equivalent US Treasury bond. We explain the variation in these sovereign spreads with four factors: global economic conditions, country-specific economic factors, liquidity of the country’s bond, and political risk. We then extract the part of the sovereign spread that is due to political risk, making use of political risk ratings. In addition, we provide new evidence that these political risk ratings are predictive, on average, of future risk realizations using data on political risk claims as well as a novel textual-based database of risk realizations. Our political risk spread measure does not make the mistake of double counting systematic risk in the evaluation of international investments, as some conventional measures do. Furthermore, we show how to construct political risk spreads for countries that do not have sovereign bond data. Finally, we link our political risk spreads to foreign direct investment (FDI). We show that a 1% point reduction in the political risk spreads is associated with a 12% increase in net-inflows of FDI.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/915a38ee88a6d60c8ebad356949aec0dbb10fd72

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Citations in the corpus

Political Uncertainty and Cost Stickiness: Evidence from National Elections around the World (2020, methodology): “After Bekaert et al. (2014), we rely on the ICRG database to specify this proxy.”
Political risk and dividend policy: Evidence from international political crises (2015, unknown): “During periods that feature political instabilities, the uncertainties associated with possible changes in government policies and in the macro environment may dramatically increase capital market participants’ risk perception (see, e.g., Pastor &Veronesi, 2012, 2013; Bekaert et al., 2014).”
What Are the Best Liquidity Proxies for Global Research (2017, background): “1 See Stahel (2005), Liang and Wei (2006), Bekaert, Harvey, and Lundblad (2007), Chan, Jain, and Xia (2008), Griffin, Kelly, and Nardari (2010), Hearn, Piesse, and Strange (2010), Griffin, Hirschey, and Kelly (2011), Lee (2011), Asness, Moskowitz, and Pedersen (2013), and Bekaert et al. (2014).”