Abstract
This study investigates the effects of political risk on the exchange rate returns of Brazil, Chile, Mexico, and Russia. The results indicate the presence of a risk premium for all currencies. Political risk was observed to negatively impact trade returns for only the Brazilian real, a result of depreciating the exchange rate. This effect was not observed for the other countries analyzed. In Brazil, transitory risk-premium volatility was positively associated with both the VIX index and political risk, indicating that greater global and local political risk increased volatility. Furthermore, local political risk had a more significant impact on risk-premium volatility than global risk.
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