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Politics and Volatility

Author

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

Abstract

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.

Suggested Citation

  • 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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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/29285/WP2008-10.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Mr. Jan-Peter Olters, 2001. "Modeling Politics with Economic Tools: A Critical Survey of the Literature," IMF Working Papers 2001/010, International Monetary Fund.
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