[enter Paper Title] Political Risks, Excess and Carry Trade Returns in Global Markets
Posted: 15 Jun 2021
Date Written: June 13, 2021
Abstract
Abstract
Double-sorting 34 currencies from developed, and emerging economies into different
portfolios based on the level of macro risk and political risk, we provide novel evidence that
local determinants of sovereign risk, including local currency volatility, are priced in the FX
markets. Local political risk in particular seems to have become an important carry
trade risk factor in the post-2007 financial crisis era. This is the first research to explain
carry trade excess returns with local sovereign risk factors as opposed to global sovereign risk
factors as a whole. We find that currency volatility risk is also important as conjectured.
High-macro risk portfolios in the face of high political risk lead to higher excess returns. Our
results are robust across country categories and currency regimes, with stronger results for
emerging economies.
Keywords: Political Risk, Sovereign Risk, Exchange Rates, Volatility, Carry Trade Returns
JEL Classification: G, F1
Suggested Citation: Suggested Citation