Abstract
AbstractWe estimate how asset prices respond to a range of political shocks, including changes in a country's economic stewardship, national elections, coup d'états, wars, and terrorist attacks. Using an event study approach and daily prices from the Buenos Aires exchange (Argentina) between 1967 and 2020, we find that stock-market volatility increases in the days immediately following major policy-shifting events. These results hold irrespective of whether returns are measured in nominal terms, in local consumption units, or in US dollars. The most significant increase in post-event risk is associated with irregular government turnovers. Volatility also increases in the days immediately following a defeat in an international war, national elections, and changes in the country's economic stewardship. No changes in stock-market volatility occur, however, after terrorist attacks or when the date of a new administration's inauguration is publicly known and determined sufficiently far in advance.
Highlights
Investors concerned about non-commercial risks need to consider their exposure to political events that may affect the value of their assets
We examine how political uncertainty affects financial volatility using daily stockmarket prices from Argentina between 1967 and 2020
We consider a wide range of political shocks, including changes in a country’s economic stewardship, national elections, coup d’états, wars, and terrorist attacks
Summary
Investors concerned about non-commercial risks need to consider their exposure to political events that may affect the value of their assets. An examination of how the different types of policy-shifting events affect asset prices reveals that the most significant increase in post-event risk is associated with irregular government turnovers (coup d’états, presidential death, and resignations). No changes in stock-market volatility occur, after terrorist attacks or when the date of a new administration’s inauguration is publicly known and determined sufficiently far in advance These results hold irrespective of whether market returns are measured in nominal terms, in local consumption units, or in US consumption units. Equity markets reveal investors’ assessments of how regulatory, fiscal, and monetary policy impact economic activity into the indefinite future These expectations are conveniently summarized in present value terms. As Kelly et al (2016) note, by raising the firms’ cost of capital, policy uncertainty can depress investment and real activity
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