Political Beta

58 Pages Posted: 10 Mar 2020

See all articles by Raymond J. Fisman

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

April M. Knill

Florida State University College of Business; Florida State University - College of Law

Sergey Mityakov

Florida State University - Department of Finance

Margarita Portnykh

Carnegie Mellon University

Date Written: March 6, 2020

Abstract

Using a framework akin to portfolio theory in asset pricing, we introduce the concept of “political beta” to model firm-level export diversification in response to global political risk. The main implication of our model is that a firm is less responsive to changes in political relations with a destination market when that country contributes less (has lower political beta) or even hedges against (has negative political beta) the firm’s total political risk. This result follows the diversification logic of portfolio theory, in which an investor values a given asset depending on the asset’s contribution to (comovement with) his/her overall investment portfolio. We find patterns consistent with our model using disaggregated Russian firm-by-destination-country data during 1999-2011: trade is positively correlated with political relations, though the effect is far weaker for trading partners whose political relations with Russia are relatively uncorrelated with those of other partners in a firm’s export portfolio. Our results highlight the importance of viewing firms’ political relations as an undiversifiable source of risk, and more generally points to the value of modeling firms’ treatment of risks as a portfolio diversification problem.

Keywords: Political risk, Capital Asset Pricing Model, Asset Pricing Theory, Portfolio Theory, Exports, Diversification, Beta

JEL Classification: F11, F14, F23, F51, G11, G12, G15, G32

Suggested Citation

Fisman, Raymond and Knill, April M. and Mityakov, Sergey and Portnykh, Margarita, Political Beta (March 6, 2020). Available at SSRN: https://ssrn.com/abstract=3550116 or http://dx.doi.org/10.2139/ssrn.3550116

Raymond Fisman

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

April M. Knill (Contact Author)

Florida State University College of Business ( email )

Tallahassee, FL 32306-1042
United States
(850) 644-2047 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

Sergey Mityakov

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States

Margarita Portnykh

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

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