We show that internationally diversified portfolios carry sizeable political risk premia and expose investors to tail risk. We obtain political efficient frontiers with and without hedging political risk using a portfolio selection model for skewed distributions and develop a new asymptotic inference test to compare portfolio performance. Politically hedged portfolios outperform a broad market index and the equally weighted portfolio for US, Eurozone, and Japanese investors. Political risk hedging is not subsumed by currency hedging, and the diversification gains of politically hedged portfolios persist under currency hedging and transaction cost frictions. Hedging political risk induces equity home bias but does not fully explain the puzzle.

中文翻译：

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对冲国际投资组合中的政治风险


我们表明，国际多元化投资组合具有相当大的政治风险溢价，并使投资者面临尾部风险。我们使用偏态分布的投资组合选择模型获得有和没有对冲政治风险的政治有效边界，并开发了一种新的渐近推理测试来比较投资组合表现。对于美国、欧元区和日本投资者来说，政治对冲投资组合的表现优于广泛市场指数和同等权重的投资组合。政治风险对冲并不包含在货币对冲中，在货币对冲和交易成本摩擦下，政治对冲投资组合的多元化收益仍然存在。对冲政治风险会诱发股票本土偏见，但并不能完全解释这个难题。