Quantifying the “Security Premium”: 15 Empirical Studies on Geopolitical Risk and Global Markets.

The relationship between geopolitical stability and equity risk premiums is a key topic for economists and investors. While short-term market changes are often driven by sentiment, the long-term data shows that institutional quality is a primary driver of financial performance.

The 11.4% Alpha: A Foundational Benchmark

A significant finding in the literature review uses the International Country Risk Guide (ICRG). Researchers tested if political risk momentum predicts equity returns.

By creating a hedge portfolio—buying stocks in countries with better ICRG ratings and selling those in deteriorating regimes—the study found that this strategy outperformed the market by approximately 11.4 percentage points per year. This shows that “stability” is a quantifiable factor with predictive power for global asset allocation.

Our New Literature Review: 15 Landmark Studies

This finding is the starting point for a new abbreviated literature review. It synthesizes 15 peer-reviewed studies that use ICRG data as a proxy for geopolitical risk. These studies cover:

• Sovereign Debt Pricing: The relationship between institutional fragility and credit spreads.
• FDI Volatility: How “Law and Order” and “Bureaucracy Quality” scores impact foreign direct investment.
• Market Integration: The role of political risk in the convergence of emerging and developed markets.
• Corporate Governance: The impact of country-level risk on firm-level valuation.

Access the Full Review

This synthesis is shared with colleagues at the IMF, central banks, and academic institutions to further the discussion on data-driven risk assessment.

A 5-page version of this review is on the LinkedIn profile.

👉 https://www.linkedin.com/in/drchristophermckee/

CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.