Precarious Politics and Return Volatility

We examine how local and global political risks affect industry return volatility. Our central premise is that some industries are more sensitive to political events than others. We find that industries that are more dependent on trade, contract enforcement, and labor exhibit greater return volatili...

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Bibliographic Details
Published in:The Review of financial studies 2012-04, Vol.25 (4), p.1111-1154
Main Authors: Boutchkova, Maria, Doshi, Hitesh, Durnev, Art, Molchanov, Alexander
Format: Article
Language:English
Subjects:
Autocracy
Contract enforcement
Contracts
Election returns
Industrial efficiency
Industry
International trade
Investment returns
Labor intensive production
Labour
Political behaviour
Political elections
Political parties
Political risk
Rates of return
Studies
Trade
Uncertainty
Volatility
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Summary:We examine how local and global political risks affect industry return volatility. Our central premise is that some industries are more sensitive to political events than others. We find that industries that are more dependent on trade, contract enforcement, and labor exhibit greater return volatility when local political risks are higher. Political uncertainty in countries of trading partners of trade-dependent industries similarly results in greater volatility. Volatility decomposition results indicate that while systematic volatility is associated with domestic political uncertainty, global political risks translate into larger idiosyncratic volatility.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhr100