Crisis Predictability in the Cross-Section of Political Uncertainty and Stock Returns

Abstract

This paper replicates the global political risk factor discovered by Gala, Pagliardi, & Zenios (2020) and documents additional predictability between political uncertainty and international stock returns by utilizing crisis data. We identify a new P-Factor returning a risk premium of 15% annually by constructing a country-specific crisis factor, excluding countries in a crisis from the long portfolio. Our findings provide empirical evidence that crisis data contain favorable information in terms of return predictability, and combining it with political ratings leads to greater risk-adjusted returns.