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Political Geography and Stock Market Volatility: The Role of Political Alignment Across Sentiment Regimes

Author

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  • Oguzhan Cepni
  • Riza Demirer
  • Rangan Gupta
  • Christian Pierdzioch

Abstract

We study the nexus between political geography and stock market volatility by examining the interrelation between political geography and the predictive relation between the state‐ and aggregate‐level stock market volatility via recently constructed measures of political alignment. Using data for 1994–2023 and random forests, we show that the importance of the state‐level volatilities as drivers of aggregate volatility displays considerable variation in the cross‐section and across time. Stronger political alignment of a state with the ruling party is associated with a lower contribution of the state's volatility to aggregate volatility. This negative link is significant during high‐sentiment periods.

Suggested Citation

  • Oguzhan Cepni & Riza Demirer & Rangan Gupta & Christian Pierdzioch, 2026. "Political Geography and Stock Market Volatility: The Role of Political Alignment Across Sentiment Regimes," Scottish Journal of Political Economy, Scottish Economic Society, vol. 73(1), February.
    • Handle: RePEc:bla:scotjp:v:73:y:2026:i:1:n:e70028
    DOI: 10.1111/sjpe.70028
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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