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Divided governments and futures prices

Listed author(s):
  • Sojli, Elvira
  • Tham, Wing Wah

This paper investigates the effect of divided governments on asset prices. For identification, we use changes in the implied probability of a divided government while votes are being counted. Using high frequency data from the betting market and US overnight futures market, we estimate a 1.4% decrease in the S&P 500 futures in the election event of a divided government. Results are similar for the 2010 UK election. Further analysis shows that divided government affects expected stock returns through the mechanism of policy uncertainty.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304407615000688
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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 187 (2015)
Issue (Month): 2 ()
Pages: 622-633

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Handle: RePEc:eee:econom:v:187:y:2015:i:2:p:622-633
DOI: 10.1016/j.jeconom.2015.02.043
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. Wong, Wing-Keung & McAleer, Michael, 2009. "Mapping the Presidential Election Cycle in US stock markets," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(11), pages 3267-3277.
  2. Lohmann, Susanne & O'Halloran, Sharyn, 1994. "Divided government and U.S. trade policy: theory and evidence," International Organization, Cambridge University Press, vol. 48(04), pages 595-632, September.
  3. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2007. "Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 807-829.
  4. Pasquale Della Corte & Lucio Sarno & Ilias Tsiakas, 2009. "An Economic Evaluation of Empirical Exchange Rate Models," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3491-3530, September.
  5. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting prediction market prices as probabilities," Working Paper Series 2006-11, Federal Reserve Bank of San Francisco.
  6. repec:cup:apsrev:v:88:y:1994:i:04:p:811-828_09 is not listed on IDEAS
  7. Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2010. "Exchange rate forecasting, order flow and macroeconomic information," Journal of International Economics, Elsevier, vol. 80(1), pages 72-88, January.
  8. repec:reg:rpubli:460 is not listed on IDEAS
  9. M. Max Croce & Howard Kung & Thien T. Nguyen & Lukas Schmid, 2012. "Fiscal Policies and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 25(9), pages 2635-2672.
  10. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2012. "Has Economic Policy Uncertainty Hampered the Recovery?," Book Chapters,in: Lee E. Ohanian & John B. Taylor & Ian J. Wright (ed.), Government Policies and the Delayed Economic Recovery, chapter 3 Hoover Institution, Stanford University.
  11. Schwert, G William, 1981. "Using Financial Data to Measure Effects of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 121-158, April.
  12. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
  13. 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.
  14. Sialm, Clemens, 2006. "Stochastic taxation and asset pricing in dynamic general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 511-540, March.
  15. repec:cup:apsrev:v:93:y:1999:i:04:p:821-835_21 is not listed on IDEAS
  16. Lee, David S., 2008. "Randomized experiments from non-random selection in U.S. House elections," Journal of Econometrics, Elsevier, vol. 142(2), pages 675-697, February.
  17. Rosendorff, B.P. & Milner, H., 1995. "Democratic Politics and International Trade Negociations: Elections and Divided Government as Constraints on Trade Liberalization," Papers 9511, Southern California - Department of Economics.
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