| Popis: |
We investigate the determinants of international stock market co-movements, shedding light on the relevance of political and confidence factors. We propose a new characterization for the channel interconnecting politics and financial markets, disentangling two different components: political risk and economic policy risk. We provide evidence of the surprisingly low correlation between the latter variables, which are indeed priced differently. We show that exclusively relying on hard macro-data would not suffice to explain the statistically and economically high returns stemming from pairs trading strategies that load on stock market co-movements. Political risk explains and predicts returns driven by both short-term and long-run co-movements. For the latter, also foreign investors' confidence plays a crucial role. Consumers' and business confidence display significant predictive power, unlike most experts' evaluations. Pairwise differences in country risk are dramatically affected by political risk and even more by economic policy risk, with the latter being a strong predictor also in the long run. |
