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Divided governments and futures prices

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  • Sojli, Elvira
  • Tham, Wing Wah

Abstract

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.

Suggested Citation

  • Sojli, Elvira & Tham, Wing Wah, 2015. "Divided governments and futures prices," Journal of Econometrics, Elsevier, vol. 187(2), pages 622-633.
  • Handle: RePEc:eee:econom:v:187:y:2015:i:2:p:622-633
    DOI: 10.1016/j.jeconom.2015.02.043
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chang, Chia-Lin & McAleer, Michael, 2015. "Econometric analysis of financial derivatives: An overview," Journal of Econometrics, Elsevier, vol. 187(2), pages 403-407.
    2. Chang, C-L. & McAleer, M.J., 2014. "Econometric Analysis of Financial Derivatives," Econometric Institute Research Papers EI 2015-02, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.

    More about this item

    Keywords

    Divided government; Elections; Expected returns; Policy uncertainty; Prediction markets;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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