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Politics and Volatility


  • Boutchkov, Maria
  • Doshi, Hitesh
  • Durnev, Art
  • Molchanov, Alexander


We investigate how politics (party orientation, national elections, and strength of democratic institutions) affect stock market volatility. We hypothesize that labor-intensive industries, industries with larger exposure to foreign trade, industries whose operations require efficient contracts, and industries susceptible to government expropriation are more sensitive to changes in political environment. Using a large panel of industry-country-year observations, we show that politically-sensitive industries exhibit higher volatilities during national elections. Volatility is also higher for labor-intensive industries under leftist governments. Moreover, governance-sensitive industries and industries under a higher risk of expropriation are more volatile when democratic institutions are weak. The rise in volatility is driven largely by systematic risk rather than firm-specific risk. The results are consistent with the 'peso problem' hypothesis that uncertainty about future government policies can increase stock market volatility.

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  • Boutchkov, Maria & Doshi, Hitesh & Durnev, Art & Molchanov, Alexander, 2008. "Politics and Volatility," CEI Working Paper Series 2008-10, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:hitcei:2008-10
    Note: November 14, 2007, Preliminary and incomplete

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    1. Roland Füss & Michael Bechtel, 2008. "Partisan politics and stock market performance: The effect of expected government partisanship on stock returns in the 2002 German federal election," Public Choice, Springer, vol. 135(3), pages 131-150, June.
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