Political Risk and Expected Government Bond Returns

29 Pages Posted: 26 Jul 2014 Last revised: 21 Jun 2019

See all articles by Johan G. Duyvesteyn

Johan G. Duyvesteyn

Robeco Asset Management

Martin Martens

Robeco Asset Management

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: March 9, 2015

Abstract

Political risk relates to both the ability and the willingness of governments to repay debts. We find that bond prices only slowly adapt to changes in political risk. The expected bond returns for countries whose political risk ratings have improved are higher than those for countries whose political risk ratings have deteriorated. This change in political risk premium cannot be explained by the risk factors default premium, term premium, and liquidity, or by momentum, changes in credit ratings, economic risk or financial risk. The risk-adjusted performance is 7.6% per annum for emerging bond markets and 0.8% per annum for euro government bonds.

Keywords: political risk, government bond debt, credit rating, emerging debt

JEL Classification: F37, G14, G17, G28, G38

Suggested Citation

Duyvesteyn, Johan G. and Martens, Martin P.E. and Verwijmeren, Patrick, Political Risk and Expected Government Bond Returns (March 9, 2015). Journal of Empirical Finance, Volume 38, Part A, September 2016, Pages 498-512, Available at SSRN: https://ssrn.com/abstract=2471096 or http://dx.doi.org/10.2139/ssrn.2471096

Johan G. Duyvesteyn (Contact Author)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Martin P.E. Martens

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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