Understanding Political Risk in a New Quantitative World

Investors view all political events (decisions that can significantly change expected returns in a particular economy) as political risks. There is a broad spectrum of specific risks including outright conflict between nations, civil war, terrorism, unsupportable populist economic policies, and—last but not least—unsustainable minority governments. Frequently, these risks are divided into those that are hard to forecast (e.g. social unrest, terrorism, riots, civil war, and coups) and those that are about policy (e.g. fiscal spending, trade, monetary policy, and investment rules). The latter can be calculated and analyzed quickly from a cost-benefit perspective. Political risks can also be viewed ex ante (i.e. probable outcomes viewed before the fact) and ex post (actual impact after events occur).

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