Review of Finance, Forthcoming
67 Pages Posted: 10 Mar 2020 Last revised: 14 Mar 2022
Date Written: March 6, 2020
Using a portfolio theory framework, we introduce the concept of political beta to model firm-level export diversification in response to global political risk. Our model predicts that firms are less responsive to changes in political relations with lower beta countries – those that contribute less to the firm’s total political risk. We document patterns consistent with our model using disaggregated Russian firm-by-destination-country data during 2001-2011: 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.
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: Suggested Citation