The World Price of Political Uncertainty

Abstract

We investigate the pricing of global political uncertainty in international equity markets. Using a sample of firms across 38 countries for the period from 1991 to 2010, we find that global political uncertainty, measured by the Baker, Bloom and Davis (2015) U.S. economic policy uncertainty index, positively impacts the cost of equity capital for non-U.S. firms. The estimates suggest that a one standard deviation increase in global political uncertainty leads to a 29 basis point (3%) increase in the cost of capital. Countries that are more integrated into the international economy suffer a higher pricing impact from global political uncertainty, especially those countries with fewer veto players. The findings highlight the significance of a global political risk premium.