Political elections and the resolution of uncertainty: The international evidence

Abstract

We investigate the behavior of stock market indices across 33 countries around political election dates during the sample period 1974–1995. We find a positive abnormal return during the two-week period prior to the election week. The positive reaction of the stock market to elections is shown to be a function of a country’s degree of political, economic and press freedom, and a function of the election timing and the success of the incumbent in being re-elected. In particular, we find strong positive abnormal returns leading up to the elections (i) in less free countries won by the opposition, and (ii) called early and lost by the incumbent government. These results are consistent with the uncertain information hypothesis (UIH) of Brown et al. (Brown, K.C., Harlow, W.V., Tinic, S.M., 1988. Journal of Financial Economics 22, 355–385) and the model of election behavior of Harrington (Harrington, J.E., 1993. The American Economic Review 83, 27–42).