Political Risk in Emerging and Developed Markets

Abstract

Using analyst estimates of political risk, we show that political risk represents a more important determinant of stock returns in emerging than developed markets. Average returns in emerging (developed) markets experiencing decreased political risk exceed those of emerging (developed) markets experiencing increased political risk by approximately 11% (2.5%) per quarter. Further, the difference between the impact of political risk in emerging and developed markets is statistically significant. We also document a global convergence in political risk. Over the last 10 years, political risk has decreased in emerging markets and increased in developed markets. If this trend continues, we expect the differential impact of political risk in emerging vs. developed markets to narrow.

JEL Classification: G15