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Can we insure against political uncertainty? Evidence from the U.S. stock market

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  • Andrea Mattozzi

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Abstract

We show that existing stocks that are currently traded in the U.S. stock market can be used to hedge political uncertainty. Focusing on the 2000 U.S. Presidential election, we construct two "presidential portfolios" composed of selected stocks anticipated to fare differently under a Bush versus a Gore presidency. To construct these portfolios we 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, we show that the excess returns of these portfolios with respect to overall market movements are significantly related to changes in electoral polls.

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File URL: http://hdl.handle.net/10.1007/s11127-008-9311-0
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Bibliographic Info

Article provided by Springer in its journal Public Choice.

Volume (Year): 137 (2008)
Issue (Month): 1 (October)
Pages: 43-55

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Handle: RePEc:kap:pubcho:v:137:y:2008:i:1:p:43-55

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Web page: http://www.springerlink.com/link.asp?id=100332

Related research

Keywords: Political uncertainty; Hedge; Financial markets; D7; G10;

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References

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  1. Pantzalis, Christos & Stangeland, David A. & Turtle, Harry J., 2000. "Political elections and the resolution of uncertainty: The international evidence," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1575-1604, October.
  2. Pedro Santa-Clara & Rossen Valkanov, 2003. "The Presidential Puzzle: Political Cycles and the Stock Market," Journal of Finance, American Finance Association, vol. 58(5), pages 1841-1872, October.
  3. Marco Celentani & J. Ignacio Conde-Ruiz & Klaus Desmet, . "Endogenous Policy Leads to Inefficient Risk Sharing," Working Papers 2003-08, FEDEA.
  4. E. Thompson, 1966. "A pareto optimal group decision process," Public Choice, Springer, vol. 1(1), pages 133-140, December.
  5. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
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Cited by:
  1. Renaud Coulomb & Marc Sangnier, 2014. "The Impact of Political Majorities on Firm Value: Do Electoral Promises or Friendship Connections Matter?," PSE Working Papers halshs-00990241, HAL.
  2. Quoc-Anh Do & Yen-Teik Lee & Bang Dang Nguyen & Kieu-Trang Nguyen, 2012. "Out of Sight, Out of Mind: The Value of Political Connections in Social Networks," Working Papers 22-2012, Singapore Management University, School of Economics.
  3. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2011. "How Prediction Markets can Save Event Studies," CESifo Working Paper Series 3434, CESifo Group Munich.
  4. Camyar, Isa & Ulupinar, Bahar, 2013. "The partisan policy cycle and firm valuation," European Journal of Political Economy, Elsevier, vol. 30(C), pages 92-111.
  5. Yen-Teik Lee & Bang Dang Nguyen & Quoc-Anh Do, 2013. "Political Connections and Firm Value: Evidence from the Regression Discontinuity Design of Close Gubernatorial Elections," Sciences Po publications 15, Sciences Po.
  6. John Goodell & Richard Bodey, 2012. "Price-earnings changes during US presidential election cycles: voter uncertainty and other determinants," Public Choice, Springer, vol. 150(3), pages 633-650, March.
  7. Michael M. Bechtel & Roland Füss, 2010. "Capitalizing on Partisan Politics? The Political Economy of Sector-Specific Redistribution in Germany," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2-3), pages 203-235, 03.

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