Yes / We find a negative relation between firm-level political risk and future delta-hedged equity option returns. A quasi-natural experiment based on Brexit corroborates this finding since after the referendum there is a decrease in the option returns of the positive-Brexit exposure firms. The predictability is driven by the jump risk component of political uncertainty, is more pronounced in periods of high intermediary constraints and is stronger among high-demand pressure options but weaker among politically active firms. Finally, consistent with a risk-based explanation, investors of options on politically risky firms get compensated with high returns when major unexpected political shocks take place.

This dissertation consists of three essays, each examining distinct dimensions of cross-sectional variation in exchange rate changes and currency returns conditional on macroeconomic variables. Chapter 2: Protectionism, Bilateral Integration, and the Cross-Section of Ex-change Rate Returns in US Presidential Debates We study the impact of US presidential election TV debates on intraday exchange rates of 96 currencies from 1996 to 2016. Expectations about protectionist measures are the main transmission channel of debate outcomes. Currencies of countries with high levels of bilateral foreign trade with the US depreciate if the election probability of the protectionist candidate increases during the debate. We rationalize our results in a model where a debate victory of a protectionist candidate raises expectations about future tariffs and reduces future net exports to the US, resulting in relative depreciation of currencies with high bilateral trade integration. Chapter 3: Global Portfolio Network and Currency Risk Premia External portfolio investments of countries can explain cross-sectional variation in currency risk premia. Using bilateral portfolio holdings of 26 countries from 2001 to 2021, I construct a network centrality measure where a country is central if it is integrated with key countries that account for a large share in the supply of tradeable financial assets. I find that currency excess returns and interest rates decrease in network centrality. The network centralities are persistent over time and offer a country-specific economic source of risk that are able to explain robust differences in currency risk premia. Empirical asset pricing tests show that the derived risk factor is priced in a cross-section of currency portfolios. Further, negative global shocks cause currencies of central countries to appreciate, while currencies of peripheral countries depreciate. I discuss the findings with implications of a consumption-based capital asset pricing model where central countries have lower consumption growth in high marginal utility states, resulting in an appreciation of their currencies. Chapter 4: FX Dealer Constraints and External Imbalances We study the impact of FX dealer banks' financial health on the cross-sectional variation of exchange rates. Using individual balance sheet information of 39 dealers, we derive an intermediary constraints index that captures the risk-bearing capacity of intermediaries. A deterioration of the solvency of dealer banks impairs their risk-bearing capacity and increases their marginal value of wealth. We test the theoretical prediction of Gabaix and Maggiori (2015) that tightening financial constraints of intermediaries are associated with increasing currency risk premia in the cross-section of the riskiness of currencies, as measured by the net foreign assets of countries. We combine dealer-specific risks to macroeconomic fundamentals of a cross-section of currencies, i.e., the indebtedness to foreigners measured by countries' net foreign assets. We show that currency excess returns increase with a country's external imbalances when constraints are relaxed, but debtor currencies experience a depreciation when constraints tighten.