Is Firm-level Political Risk Priced in the Corporate Bond Market?

55 Pages Posted: 6 Feb 2024

See all articles by Luis Ceballos

Luis Ceballos

University of San Diego

Vanja Piljak

University of Vaasa - Department of Accounting and Finance

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Asset Management

Date Written: January 2, 2024

Abstract

We investigate whether political risk is priced in the cross-section of corporate bond returns by using a text-based measure of firm-level political risk. We document a positive and significant political risk premium after controlling for bond and firm characteristics, conventional risk factors, and exposure to aggregate economic policy uncertainty. Bonds with higher political and credit risk, as well as smaller, more illiquid, and longer maturity corporate bonds exhibit a larger political risk premium. Time-series analysis indicates that monetary policy shocks and common shocks in the equity and bond market exhibit a statistically significant and positive association with the political risk premium. Our findings reveal the importance of idiosyncratic political risk beyond common risk factors and aggregate economic policy uncertainty.

Keywords: Bonds, Corporate bonds, Fixed income, Political risk

JEL Classification: G10, G12

Suggested Citation

Ceballos, Luis and Piljak, Vanja and Swinkels, Laurens, Is Firm-level Political Risk Priced in the Corporate Bond Market? (January 2, 2024). Available at SSRN: https://ssrn.com/abstract=4691029 or http://dx.doi.org/10.2139/ssrn.4691029

Luis Ceballos (Contact Author)

University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

HOME PAGE: http://www.luisceballoss.com/

Vanja Piljak

University of Vaasa - Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland

Laurens Swinkels

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Asset Management ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

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