Democratization, Inequality, and Risk Premia

Jacobs Levy Equity Management Center Working Paper Series

76 Pages Posted: 15 Jan 2020 Last revised: 14 Mar 2020

See all articles by Max Miller

Max Miller

University of Pennsylvania, The Wharton School, Finance Department

Date Written: December 24, 2019

Abstract

Periods of democratization exhibit economically large spikes in risk premia. Using a panel data set covering 57 countries over 200 years, I show that during periods of democratization, the equity premium and corporate credit spreads are significantly elevated, despite little to no effect on aggregate consumption and dividends. Further, I use a quasi-natural experiment coming from a shift in Catholic church attitudes toward democracy and show that this change was associated with a large increase in average excess returns for majority Catholic and autocratic countries. Finally, I show that these results can be rationalized through a standard political economy model in which the wealthiest segments of society are negatively impacted by the consolidation of democracy. These results are key to understanding how political institutions and the distribution of wealth and political power influence asset returns.

Keywords: Democracy, Equity Premium, Credit Spreads, Democratization, Inequality, Political Institutions, Catholic Church

JEL Classification: B17, B27, F30, F65, G00, G10, G12, G15, P16, P26

Suggested Citation

Miller, Max, Democratization, Inequality, and Risk Premia (December 24, 2019). Jacobs Levy Equity Management Center Working Paper Series. Available at SSRN: https://ssrn.com/abstract=3488208 or http://dx.doi.org/10.2139/ssrn.3488208

Max Miller (Contact Author)

University of Pennsylvania, The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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