This paper develops and empirically supports, using 3 and 6 month interest rates, a theory that political risk can explain the shifting term premia found in U.S. data. We find that incorporating these political regime shifts yield results that support the expectations hypothesis.

This paper employs the Bai and Perron (1998, 2003) structural break methodology to investigate whether the CAPM betas for banking sector stocks are time invariant. I find evidence for three large structural shifts in my monthly (1941.02–2008.01) sample. The third break corresponds with a...