Precarious Politics and Return Volatility
49 Pages Posted: 18 Dec 2008 Last revised: 28 Jul 2011
Date Written: July 25, 2011
We examine how local and global political risks affect industry return volatility. Our central premise is that some industries are more sensitive to political events than others. We find that industries that are more dependent on trade, contract enforcement, and labor exhibit greater return volatility when local political risks are higher. Political uncertainty in countries of trading partners of trade-dependent industries similarly results in greater volatility. Volatility decomposition results indicate that while systematic volatility is associated with domestic political uncertainty, global political risks translate into larger idiosyncratic volatility.
Keywords: Politics, Volatility
JEL Classification: F30
Suggested Citation: Suggested Citation