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Can we insure against political uncertainty? Evidence from the U.S. Stock Market

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  • Mattozzi, Andrea

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.

Suggested Citation

  • Mattozzi, Andrea, 2004. "Can we insure against political uncertainty? Evidence from the U.S. Stock Market," Working Papers 1207, California Institute of Technology, Division of the Humanities and Social Sciences.
    • Handle: RePEc:clt:sswopa:1207
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    File URL: http://www.hss.caltech.edu/SSPapers/wp1207-2.pdf
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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.
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    3. 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.
    4. Ayers, Benjamin C & Cloyd, C Bryan & Robinson, John R, 2005. ""Read My Lips . . .": Does the Tax Rhetoric of Presidential Candidates Affect Security Prices?," Journal of Law and Economics, University of Chicago Press, vol. 48(1), pages 125-148, April.
    5. E. Thompson, 1966. "A pareto optimal group decision process," Public Choice, Springer, vol. 1(1), pages 133-140, December.
    6. 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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    More about this item

    Keywords

    political uncertainty; financial markets;

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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