The Effect of Political Risk on Stock Markets: A Literature Review

Abstract

There are different types of risks that investors should consider. The risk, defined as the "probability of deviation of the expected return from the actual return" in the finance literature, is divided into two groups, systematic and non-systematic risks. The purpose of this article is to examine the studies on how the political risk, which is one of the systemic risks, affects the financial markets, and to present the findings obtained in these studies to the readers. In this context, choices from political risk factors, Brexit Referendum, terrorist incidents, wars and international politic risk index were examined and studies in the local and foreign literature were examined. While determining the studies included in the article, studies investigating the results of the related events on stock markets were preferred. Thus, it is aimed that readers will be able to make a general assessment of political risk in stock markets. According to the results of the research conducted with the literature review method, it was determined that the political risk significantly affected the stock returns, and this effect varied depending on different factors such as the type of the event examined, the level of importance and the structure of the markets investigating the impact.