Published papers

There exists a trade-off between higher risk-adjusted performance and lower political risk exposure or political ratings. We develop a model to construct international portfolios that are hedged against political risk, and we show that international diversification benefits persist even when hedging political risk.

with Somayyeh Lotfi, Efstathios Paparoditis, and Stavros Zenios 

Published in European Journal of Operational Research (ABS 4), 2025, Vol 322 (2), pp 629-646

We show that internationally diversified portfolios carry sizeable political risk premia and expose investors to tail risk. We obtain political efficient frontiers with and without hedging political risk using a portfolio selection model for skewed distributions and develop a new asymptotic inference test to compare portfolio performance. Politically hedged portfolios outperform a broad market index and the equally weighted portfolio for US, Eurozone, and Japanese investors. Political risk hedging is not subsumed by currency hedging, and the diversification gains of politically hedged portfolios persist under currency hedging and transaction cost frictions. Hedging political risk induces equity home bias but does not fully explain the puzzle. 

Equity investment strategies exploiting cross-country return predictability by politics-policy uncertainty generate abnormal returns as large as 15% per annum with significant low-cost diversification benefits. A global multi-factor model including a tradeable political risk factor successfully prices country returns. 

with Vito Gala and Stavros Zenios 

Published in Journal of Empirical Finance (ABS 3), 2023, Vol 72, pp 78-102

Open access journal version

Using novel measures of politics-policy uncertainty we document predictable variation in stock market returns across countries. Country characteristics and existing global and local risk factors do not account for such predictability, leading to large abnormal returns up to 15% per annum. We identify a global political risk factor (P-factor) commanding a risk premium of 11% per annum. High political uncertainty countries covary positively with the P-factor, earning higher average returns. Augmenting the global market portfolio with the P-factor significantly reduces pricing errors and improves cross-sectional fit. Politics-policy uncertainty affects returns through both cash-flow and discount rate channels.

The extreme correlation between return and volume progressively declines as we move towards the tails of the returns distribution, suggesting that extreme events as market booms and crashes are not necessarily associated with and driven by very large transaction volumes.

Media coverage:

• Huffington Post France (Article in French)

• Council on Business and Society

with François Longin

Published in Economics Letters (ABS 3), 2016 - Volume 145, pp 252-254

Working paper version

Using daily data of the S&P 500 index from 1950 to 2015, we investigate the relation between return and transaction volume in the statistical distribution tails associated with booms and crashes in the US stock market. We use extreme value theory (peaks-over-threshold method) to study the extreme dependence between the two variables. We show that the extreme correlation between return and volume decreases as we consider larger events in both the left and right distribution tails. From an economic viewpoint, this paper contributes to a better understanding of the activity of market participants during extreme events. Our empirical result is consistent with the economic explanation by Gennotte and Leland (1990) of extreme price movements based on misinterpretation of trades by market participants.