IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v189y2021icp51-83.html
   My bibliography  Save this article

The price of populism: Financial market outcomes of populist electoral success

Author

Listed:
  • Stöckl, Sebastian
  • Rode, Martin

Abstract

Following financial research on the importance of public policy for asset prices, we hypothesize that the success of populist movements impacts risk assessments in financial markets. Building a novel dataset, findings show for a sample of Western democracies that the success of populist parties has a direct impact on volatility in major domestic market indexes, measured from option prices spanning national elections. Despite its anti-capitalist rhetoric, the political insecurity generated by populist movements on the far left only partially translates into financial insecurity in the context of institutionalized democracies. In turn, we find the electoral success of right-wing populists to reduce risk assessments, which could be driven by its frequent association with rent-seeking and big business.

Suggested Citation

  • Stöckl, Sebastian & Rode, Martin, 2021. "The price of populism: Financial market outcomes of populist electoral success," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 51-83.
    • Handle: RePEc:eee:jeborg:v:189:y:2021:i:c:p:51-83
    DOI: 10.1016/j.jebo.2021.06.037
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268121002766
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2021.06.037?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hanke, Michael & Poulsen, Rolf & Weissensteiner, Alex, 2018. "Event-Related Exchange-Rate Forecasts Combining Information from Betting Quotes and Option Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(6), pages 2663-2683, December.
    2. Rudiger Dornbusch & Sebastian Edwards, 1991. "The Macroeconomics of Populism in Latin America," NBER Books, National Bureau of Economic Research, Inc, number dorn91-1, March.
    3. Dani Rodrik, 2018. "Populism and the economics of globalization," Journal of International Business Policy, Palgrave Macmillan, vol. 1(1), pages 12-33, June.
    4. Chunfang Cao & Xiaoyang Li & Guilin Liu, 2019. "Political Uncertainty and Cross-Border Acquisitions," Review of Finance, European Finance Association, vol. 23(2), pages 439-470.
    5. Çolak, Gönül & Durnev, Art & Qian, Yiming, 2017. "Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2523-2564, December.
    6. Dani Rodrik, 2018. "Is Populism Necessarily Bad Economics?," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 196-199, May.
    7. Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz Piotr, 2008. "Stock market volatility around national elections," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1941-1953, September.
    8. Grier, Kevin & Maynard, Norman, 2016. "The economic consequences of Hugo Chavez: A synthetic control analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 1-21.
    9. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    10. Hanke, Michael & Stöckl, Sebastian & Weissensteiner, Alex, 2020. "Political event portfolios," Journal of Banking & Finance, Elsevier, vol. 118(C).
    11. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    12. Beber, Alessandro & Brandt, Michael W., 2006. "The effect of macroeconomic news on beliefs and preferences: Evidence from the options market," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1997-2039, November.
    13. Bonaime, Alice & Gulen, Huseyin & Ion, Mihai, 2018. "Does policy uncertainty affect mergers and acquisitions?," Journal of Financial Economics, Elsevier, vol. 129(3), pages 531-558.
    14. Brandon Julio & Youngsuk Yook, 2012. "Political Uncertainty and Corporate Investment Cycles," Journal of Finance, American Finance Association, vol. 67(1), pages 45-84, February.
    15. Funke, Manuel & Schularick, Moritz & Trebesch, Christoph, 2016. "Going to extremes: Politics after financial crises, 1870–2014," European Economic Review, Elsevier, vol. 88(C), pages 227-260.
    16. Inglehart, Ronald F. & Norris, Pippa, 2016. "Trump, Brexit, and the Rise of Populism: Economic Have-Nots and Cultural Backlash," Working Paper Series 16-026, Harvard University, John F. Kennedy School of Government.
    17. Sebastian Edwards, 2019. "On Latin American Populism, and Its Echoes around the World," Journal of Economic Perspectives, American Economic Association, vol. 33(4), pages 76-99, Fall.
    18. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    19. Martin Rode & Julio Revuelta, 2015. "The Wild Bunch! An empirical note on populism and economic institutions," Economics of Governance, Springer, vol. 16(1), pages 73-96, February.
    20. Krause, Werner & Giebler, Heiko, 2020. "Shifting Welfare Policy Positions: The Impact of Radical Right Populist Party Success Beyond Migration Politics," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 56(3), pages 331-348.
    21. Yotam Margalit, 2019. "Economic Insecurity and the Causes of Populism, Reconsidered," Journal of Economic Perspectives, American Economic Association, vol. 33(4), pages 152-170, Fall.
    22. Petar Stankov, 2018. "The Political Economy of Populism: An Empirical Investigation," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(2), pages 230-253, June.
    23. Ľuboš Pástor & Pietro Veronesi, 2021. "Inequality Aversion, Populism, and the Backlash against Globalization," Journal of Finance, American Finance Association, vol. 76(6), pages 2857-2906, December.
    24. Robert J. Ritchey, 1990. "Call Option Valuation For Discrete Normal Mixtures," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(4), pages 285-296, December.
    25. Niklas Potrafke, 2011. "Does government ideology influence budget composition? Empirical evidence from OECD countries," Economics of Governance, Springer, vol. 12(2), pages 101-134, June.
    26. Niklas Potrafke, 2010. "Does government ideology influence deregulation of product markets? Empirical evidence from OECD countries," Public Choice, Springer, vol. 143(1), pages 135-155, April.
    27. Bryan Kelly & Ľuboš Pástor & Pietro Veronesi, 2016. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," Journal of Finance, American Finance Association, vol. 71(5), pages 2417-2480, October.
    28. Sebastian Edwards, 2019. "On Latin American Populism, And Its Echoes Around the World," NBER Working Papers 26333, National Bureau of Economic Research, Inc.
    29. Christian Bjørnskov, 2019. "Populism: Three approaches to an international problem," Economic Affairs, Wiley Blackwell, vol. 39(2), pages 273-281, June.
    30. Ritchey, Robert J, 1990. "Call Option Valuation for Discrete Normal Mixtures," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(4), pages 285-296, Winter.
    31. Rudiger Dornbusch & Sebastian Edwards, 1991. "The Macroeconomics of Populism," NBER Chapters, in: The Macroeconomics of Populism in Latin America, pages 7-13, National Bureau of Economic Research, Inc.
    32. Christian Bjørnskov & Niklas Potrafke, 2012. "Political Ideology and Economic Freedom Across Canadian Provinces," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 38(2), pages 143-166.
    33. Julio, Brandon & Yook, Youngsuk, 2016. "Policy uncertainty, irreversibility, and cross-border flows of capital," Journal of International Economics, Elsevier, vol. 103(C), pages 13-26.
    34. Jeffrey D. Sachs, 1989. "Social Conflict and Populist Policies in Latin America," NBER Working Papers 2897, National Bureau of Economic Research, Inc.
    35. Robert R. Kaufman & Barbara Stallings, 1991. "The Political Economy of Latin American Populism," NBER Chapters, in: The Macroeconomics of Populism in Latin America, pages 15-43, National Bureau of Economic Research, Inc.
    36. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    37. Jens, Candace E., 2017. "Political uncertainty and investment: Causal evidence from U.S. gubernatorial elections," Journal of Financial Economics, Elsevier, vol. 124(3), pages 563-579.
    38. Manoel Bittencourt, 2012. "Democracy, populism and hyperinflation: some evidence from Latin America," Economics of Governance, Springer, vol. 13(4), pages 311-332, December.
    39. Rudiger Dornbusch & Sebastian Edwards, 1991. "Introduction to "The Macroeconomics of Populism in Latin America"," NBER Chapters, in: The Macroeconomics of Populism in Latin America, pages 1-4, National Bureau of Economic Research, Inc.
    40. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    41. Maria Boutchkova & Hitesh Doshi & Art Durnev & Alexander Molchanov, 2012. "Precarious Politics and Return Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 1111-1154.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jante Parlevliet & Massimo Giuliodori & Matthijs Rooduijn, 2023. "Populist attitudes, fiscal illusion and fiscal preferences: evidence from Dutch households," Public Choice, Springer, vol. 197(1), pages 201-225, October.
    2. Daniel L. Bennett & Christopher Boudreaux & Boris Nikolaev, 2023. "Populist discourse and entrepreneurship: The role of political ideology and institutions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 54(1), pages 151-181, February.
    3. Pan, Wei-Fong, 2023. "The effect of populism on high-skilled migration: Evidence from inventors," European Journal of Political Economy, Elsevier, vol. 79(C).
    4. Luisa Doerr & Niklas Potrafke & Felix Roesel, 2021. "Populists in Power," CESifo Working Paper Series 9336, CESifo.
    5. Strobl, Martin & Sáenz de Viteri, Andrea & Rode, Martin & Bjørnskov, Christian, 2023. "Populism and inequality: Does reality match the populist rhetoric?," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 1-17.
    6. Pan, Wei-Fong, 2023. "Household debt in the times of populism," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 202-215.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giray Gozgor, 2022. "The role of economic uncertainty in the rise of EU populism," Public Choice, Springer, vol. 190(1), pages 229-246, January.
    2. Pan, Wei-Fong, 2023. "Household debt in the times of populism," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 202-215.
    3. Benczes, István & Szabó, Krisztina, 2023. "Társadalmi törésvonalak és gazdasági (ir)racionalitások. A közgazdaságtan szerepe és helye a populizmus kutatásában [Social cleavages and economic (ir)rationalities: The role of economics in populi," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 23-54.
    4. Manuel Funke & Moritz Schularick & Christoph Trebesch, 2023. "Populist Leaders and the Economy," American Economic Review, American Economic Association, vol. 113(12), pages 3249-3288, December.
    5. Christopher Ball & Andreas Freytag & Miriam Kautz, 2019. "Populism-What Next? A First Look at Populist Walking-Stick Economies," CESifo Working Paper Series 7914, CESifo.
    6. Strobl, Martin & Sáenz de Viteri, Andrea & Rode, Martin & Bjørnskov, Christian, 2023. "Populism and inequality: Does reality match the populist rhetoric?," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 1-17.
    7. Sergei Guriev & Elias Papaioannou, 2022. "The Political Economy of Populism," Journal of Economic Literature, American Economic Association, vol. 60(3), pages 753-832, September.
    8. Chahine, Salim & Daher, Mai & Saade, Samer, 2021. "Doing good in periods of high uncertainty: Economic policy uncertainty, corporate social responsibility, and analyst forecast error," Journal of Financial Stability, Elsevier, vol. 56(C).
    9. Kwabi, Frank Obenpong & Boateng, Agyenim & Wonu, Chizindu & Kariuki, Charles & Du, Anna, 2023. "Political uncertainty and cross-border equity portfolio allocation decisions: International evidence," International Review of Financial Analysis, Elsevier, vol. 87(C).
    10. Martin Rode & Julio Revuelta, 2015. "The Wild Bunch! An empirical note on populism and economic institutions," Economics of Governance, Springer, vol. 16(1), pages 73-96, February.
    11. Cheng, Mengyao, 2022. "Legislative gridlock and stock return dispersion around roll-call votes," Journal of Banking & Finance, Elsevier, vol. 138(C).
    12. Federico Faveretto & Donato Masciandaro, 2018. "Financial Inequality, group entitlements and populism," BAFFI CAREFIN Working Papers 1892, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    13. Campos, Luciano & Casas, Agustín, 2021. "Rara Avis: Latin American populism in the 21st century," European Journal of Political Economy, Elsevier, vol. 70(C).
    14. Bree J. Lang & Pratish Patel, 2023. "Funding infrastructure under uncertainty: evidence from tax credit prices," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 635-677, June.
    15. Tito Boeri & Prachi Mishra & Chris Papageorgiou & Antonio Spilimbergo, 2021. "Populism and Civil Society," Economica, London School of Economics and Political Science, vol. 88(352), pages 863-895, October.
    16. Luo, Yan & Zhang, Chenyang, 2020. "Economic policy uncertainty and stock price crash risk," Research in International Business and Finance, Elsevier, vol. 51(C).
    17. Chan, Kam Fong & Marsh, Terry, 2021. "Asset prices, midterm elections, and political uncertainty," Journal of Financial Economics, Elsevier, vol. 141(1), pages 276-296.
    18. Gian Italo Bischi & Federico Favaretto & Edgar J. Sanchez Carrera, 2022. "Long-term causes of populism," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(1), pages 349-377, January.
    19. Chen, Yanyan, 2022. "Does political turnover affect corporate investment? Evidence from China," Emerging Markets Review, Elsevier, vol. 51(PA).
    20. Boulton, Thomas J., 2022. "Economic policy uncertainty and international IPO underpricing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).

    More about this item

    Keywords

    Populism; Elections; Political uncertainty; Option markets; Implied volatility; Political ideology;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • P43 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Finance; Public Finance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:189:y:2021:i:c:p:51-83. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.