Abstract
Abstract We examine the relationship between election uncertainty, economic policy uncertainty, and financial market uncertainty in a prediction-market analysis, covering seven US presidential election campaigns. We argue theoretically that changes in the incumbent party re-election probability should be a key driver of changes in policy uncertainty. Consistent with this theory, we find that a large portion of changes in financial uncertainty in the final stages of election campaign seasons is explained by changes in the probability of the incumbent party getting re-elected. Our findings suggest that the incumbent-party election probability, derived from prediction markets, is an important measure of economic policy uncertainty in the days leading up to US elections.
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