Economic policy has an empirically documented relationship to asset prices. For example, sovereign bonds of economically “free” countries typically have higher credit ratings and much tighter yield spreads than those of countries where economic policy is much less liberal. It follows then that an investor who can correctly assess whether a country is becoming more/less economically free can – all else equal – potentially make money for their clients. Since markets appear to appropriately discount current economic policy conditions, the challenge for professional investors is to understand and accurately forecast the likely direction of policy change.
Eaton Vance recently conducted research on this subject, seeking to identify the determinants, the precedent conditions, to economic policy change. Our research looked specifically at the relationship between a country’s political institutions and its future economic policy changes.
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