Novel investment strategies exploiting cross-country return predictability by political uncertainty generate large abnormal returns within and across equity, bond, and FX markets. The table above displays the risk premia, in percentage points, of political factors constructed with different political ratings and within and across multiple asset classes. A global multi-factor model including a tradeable (multi-asset) political risk factor successfully prices country returns within and across asset classes. 

Country risk premia include compensation for global political risk. Political risk premia drive international returns within and across asset classes, including equities, bonds, and currencies. A strong factor structure in politically sorted portfolios uncovers systematic variations in global political risk (P-factor). The P-factor commands a significant risk premium of 4.44% per annum with a Sharpe ratio of 0.70. Together with the global market portfolio, it explains up to three-quarters of cross-sectional variation in a large panel of asset returns. The P-factor is unspanned by the existing asset pricing factors, manifests in all asset classes, and is related to systematic variations in expected global growth and aggregate volatility.

While remaining fairly constant in the previous four decades, from 2001 the ratio between US money supply and total output starts diverging and cointegrating with the stock market level. The short-run deviations from this long-run relationship forecast stock excess returns -- in the US and around the world -- as well as corporate bond excess returns. Accounting for growth in money supply becomes important with unconventional monetary policies, during which interest rates are not anymore sufficient statistics to describe the impact of monetary policy on financial markets.

We uncover evidence of asset price inflation that is a result of unconventional monetary policy (UMP). A novel measure of disequilibrium in desired money holdings caused by UMP predicts future stock returns. This predictability is unrelated to business cycle risk and hence represents asset price inflation. The predictability holds in and out of sample, in corporate bond markets, across other countries that enacted unconventional monetary policies and those that did not. We find no evidence that UMP led to higher economic activity through firm investment or wealth channels, which we show is most likely a result of increasing uncertainty that instead led to higher savings-to-consumption ratios.

Political shocks can render seemingly sustainable debt unsustainable. Political reforms can restore debt sustainability. The effects are particularly pronounced in high-risk countries.

with Samantha Ajovalasit, Andrea Consiglio and Stavros Zenios

We show that political risk is a significant determinant of bond yields and economic growth in both developed and emerging markets and develop a debt sustainability analysis model with both channels using a country rating proxy of political risk. Political risk can render debt unsustainable, triggered by changes in the rating level, volatility, or both. Conversely, sustainability can be restored through reforms that can be as effective as large-scale quantitative easing programs. The political effects on debt are especially large for high-debt countries during periods of high interest rates and impact debt management through the choice of optimal financing maturities. 

A pairs trading strategy implemented on international stock markets generates sizeable abnormal returns that can be partly attributed to similar political riskiness of pairs of countries.

with Patrice Poncet

We investigate the determinants of international stock market co-movements, shedding light on the relevance of politics and policy factors. We implement a pairs trading strategy, in the spirit of Gatev et al. (2006), which loads on international stock market co-movements. Exclusively relying on hard macro-data proves not to be sufficient to explain the statistically significant and economically large returns generated by the strategy. We show how to increase the abnormal returns (alphas) generated by the strategy by exploiting shorter-time co-movements. We document the relevance of pairwise differences in political and policy risks, which help explain and predict returns driven by both short-term and long-run correlations.