The financial costs of political uncertainty: Evidence from the 2016 US presidential elections (original) (raw)
Related papers
arXiv: General Finance, 2017
There is bountiful evidence that political uncertainty stemming from presidential elections or doubt about the direction of future policy make financial markets significantly volatile, especially in proximity to close elections or elections that may prompt radical policy changes. Although several studies have examined the association between presidential elections and stock returns, very little attention has been given to the impacts of elections and election induced uncertainty on stock markets. This paper explores, at sectoral level, the uncertain information hypothesis (UIH) as a means of explaining the reaction of markets to the arrival of unanticipated information. This hypothesis postulates that political uncertainty is greater prior to the elections (relative to pre-election period) but is resolved once the outcome of the elections is determined (relative to post-election period). To this end, we adopt an event-study methodology that examines abnormal return behavior around t...
Can we insure against political uncertainty? Evidence from the U.S. stock market
Public Choice, 2008
I show that shares currently traded on U.S. stock markets can be used to hedge political uncertainty. Focusing on the 2000 U.S. presidential election, I construct two "presidential portfolios" composed of selected stocks anticipated to fare differently under a Bush versus a Gore presidency. To construct these portfolios I use data on campaign contributions by publicly traded corporations and identify the major contributors on each side. Using daily observations for the six months before the election took place, I show that the excess returns of these portfolios with respect to overall market movements are significantly related to changes in electoral polls. JEL classification numbers: D7, G10.
Economics & Politics, 2020
We study how the predictability and the decisiveness of electoral outcomes affect financial volatility. We argue that traders' optimal investment strategies depend on their ability to make accurate electoral forecasts and the prospective losses associated with placing a bet on the wrong candidate. Using a triple difference-indifference approach and data from two-round presidential elections in five Latin American countries between 1999 and 2018, we find that financial volatility is greatest in the days immediately following unpredictable, decisive, elections. Postelectoral volatility also occurs following predictable, indecisive elections. The effect of learning the identity of the winning candidate on financial volatility is null when the election is unpredictable and indecisive, as well as when the election is decisive, but the outcome is predictable. These findings offer insights into investors seeking to hedge price risk around elections. They also have important implications regarding the relationship between public opinion polls and postelectoral financial volatility. K E Y W O R D S domestic political economy, elections, financial volatility, Latin America 2 | CARNAHAN ANd SAIEGH 1 | INTRODUCTION On August 12, 2019, Argentine assets suffered an unprecedented decline as investors dumped the country's currency, bonds, and stocks. The peso tumbled as much as 25%, dollar-denominated government bonds lost roughly 25% on average, and the country's benchmark stock index fell by 48%. The sell-off was an immediate response to incumbent President Mauricio Macri's loss to Peronist Alberto Fernández in a primary election, which occurred the day before. Hailed by Macri as a landmark election, the country's peculiar brand of primaries was widely seen as a preview of the country's forthcoming presidential contest. Just a day prior to the election, five different polling firms showed Fernandez in a statistical dead heat with Macri. 1 The biggest unanswered question was whether either of the candidates could garner 45% of the vote and make a second-round runoff election less likely. On election day, Macri lost by a far greater margin than expected. He received only 32.1% of the vote, compared to Fernandez's 47.7%. This example illustrates the main issue that motivates our analysishow electoral outcomes can set off a shockwave in the financial markets. Not all elections, however, lead to financial turmoil. Indeed, the Argentine benchmark stock index fell by <4% on October 28, 2019, the day following Alberto Fernandez's much anticipated electoral victory. These two radically different outcomes from the same country, during the same electoral cycle, and pitting the same two candidates against one another highlight how investors' trading strategies respond to both the accuracy of pre-electoral forecasts and an election's decisiveness. Election outcomes can be predictable or unpredictable ex-ante. They can also be decisive or indecisive. The former occurs whenever a candidate surpasses the required electoral threshold required to achieve an outright victory. In contrast, an election is indecisive when no candidate receives sufficient votes to clear the required winning threshold. To examine the effect of these different electoral outcomes on financial markets, we model traders' decisions as a sequential sampling problem where the optimal stopping strategy is driven by information-gathering costs and an investment's suitability to the future state of the world (De Groot, 1970). We establish that risk-neutral traders should wait to make their investment decisions until the electoral results are known if: (a) The winner is predictable ex-ante, but the election is indecisive; or (b) the winner is unpredictable ex-ante, but the election is decisive. In contrast, delaying an investment should not be profitable when (c) the winner is unpredictable ex-ante, but the election is indecisive; or (d) the winner is predictable ex-ante, but the election is decisive. A direct empirical implication of these optimal waiting strategies is that financial volatility should increase whenever traders have an incentive to postpone their investment decisions. The arrival of postelectoral news would induce traders to update their beliefs and search for new asset prices, triggering portfolio rebalancing and an increase in short-term price volatility. On the other hand, when traders do not have an incentive to delay their investments, there will be little difference between financial volatility before and after the election. We focus on emerging markets where presidential elections are held under a two-round electoral system to empirically test our main argument. In this voting method (also known as the second ballot, runoff voting, or ballotage), a second round is held if no candidate or party achieves a given level of votes. The top two vote-getters move to the second round, and new balloting determines the winner by simple plurality voting. As such, elections held under these rules provide a great opportunity to identify decisive versus indecisive contests. Five of the six emerging markets with runoff presidential elections are in Latin America: Argentina, Brazil, Chile, Colombia, and Peru. Based on these criteria, our sample covers 36 elections in these five countries between 1999 and 2018. Using daily data and an event-study approach, we calculate the second moment of index excess return distribution in the countries included our sample.
Political elections and the resolution of uncertainty: The international evidence
Journal of Banking & Finance, 2000
We investigate the behavior of stock market indices across 33 countries around political election dates during the sample period 1974±1995. We ®nd a positive abnormal return during the two-week period prior to the election week. The positive reaction of the stock market to elections is shown to be a function of a countryÕs degree of political, economic and press freedom, and a function of the election timing and the success of the incumbent in being re-elected. In particular, we ®nd strong positive abnormal returns leading up to the elections (i) in less free countries won by the opposition, and (ii) called early and lost by the incumbent government. These results are consistent with the uncertain information hypothesis (UIH) of Brown et al. (Brown, K.C., Harlow, W.V., Tinic, S.M., 1988. Journal of Financial Economics 22, 355±385) and the model of election behavior of Harrington (Harrington, J.E., 1993. The American Economic Review 83, 27±42). Ó
Elections and Markets: The Effect of Partisan Orientation, Policy Risk,
Rational partisan theory's exclusive focus on electoral uncertainty ignores the importance of policy uncertainty for the economy. I develop a theory of policy risk to account for this uncertainty. Using an innovative measure of electoral probabilities based on Iowa Electronic Markets futures data for the United States from 1988 to 2000, I test both theories. As predicted by rational partisan theory, positive changes in the probability that the Left wins the Presidency or the Congress lead to increases in nominal interest rates, implying that expectations of inflation have increased. As predicted by the policy risk theory, positive changes in the electoral probability of incumbent governments and divided governments lead to significant declines in interest rates, implying that expectations of inflation risk have decreased. And as an extension to both theories, I find that electoral margins matter for the economy--partisan and policy risk effects depend not only on which party controls the government, but how large its margin of victory is.
The impact of political variables on stock returns and investor sentiment
In this paper, we employ econometric techniques to examine the impact of political variables on investor sentiment, stock market returns, and the covariance between investor sentiment and equity returns. Similar to prior studies our results indicate that stock market returns are higher during Democratic presidencies. Contrast we also find that both investor sentiment and the covariance between investor sentiment and stock returns are both higher when Democrats control the White House. Our results seem to suggest that political variables not only influence stock returns, but they also influence the way investors feel about the market.
POLITICAL UNCERTAINTY AND FIRM INVESTMENT CONNECTION
IAEME PUBLICATION, 2021
The current study aims to examine the relationship between political uncertainty and investment behavior of listed firms in Pakistan. To empirical investigation is done by using Prime Ministership and presidential elections of Pakistan as a source of plausibly exogenous variation in uncertainty. To establish the empirical status of the hypotheses, secondary data of 70 non-financial firms is collected for 10 years i.e. 2008 to 2017. Generalized Method of Moments (GMM) has been applied to address the problem of endogeneity. Results depict decline in investment before elections period. Further it provides evidence that political uncertainty influence the firms ‘investment behavior and postponed equity and debt issuances before elections. The study is beneficial and source of awareness for regional and international investors, bankers, fund Managers, decision makers, researchers and academia towards portfolio diversification and exploit investment opportunities.
Political Cycles, Investor Sentiment, and Stock Market Returns
In this study, we examine the relationships among political cycles, investor sentiment, and stock market returns. We uncover that the variable: change in investor sentiment levels, is a mediator for the relationship between political cycles and stock market returns. We establish that political cycles impact stock market returns through two channels. First, there is a direct impact of fiscal and regulatory policies on corporate fundamentals which is reflected in stock prices, and second, there is an indirect impact through the change in investor sentiment levels which in turn impacts stock prices. Additionally, we empirically examine the relationship between presidential elections cycles and investor sentiment, and find that investor sentiment levels are lower and improve during Democratic presidential terms and are higher and decline during Republican presidential terms.
Political Uncertainty and Risk Premium in the Brazilian Stock Market
Objetives. Analyze how the political uncertainty affects the risk premium in the Brazilian market from January 1996 to December 2016. Methodology. This study adopting the econometric model proposed by Pastor and Veronesi (2013) to analyse five approaches to measure risk premium in Brazil, a country where is difficult to estimate a reliable historical premium because of the short and volatile histories. Findings. The study shows a positive and statistically significant relation between political uncertainty and risk premium. In addition, the results suggest that the Brazilian and the American market seem different perceptions about the effect of political uncertainty. Limitations. The limited size of our sample could be problem to conduct a more comprehensive statistical analysis. Originality/Value. The Political Uncertainty has recently received increased attention from the media and the academics. However, we contribute to this debate by empirically investigating the effect of policy uncertainty on five different approach of estimates risk premium in markets that are not mature.
The effect of presidential election in the USA on stock return flow – a study of a political event
Economic Research-Ekonomska Istraživanja, 2017
The subject of this paper is to determine the statistical significance of abnormal return that appeared on the New York Stock Exchange after the presidential election in the USA in November 2012. The analysis is focused on securities of the financial institutions listed on the New York Stock Exchange, whereby 85 companies have been included. For the purposes of the analysis a standard methodology of event study has been used. In general, parametric tests show a statistically significant negative impact of the event on stock return, whereby with the nonparametric tests there is no consistent estimation. This paper provides an interpretation of the results.