Political uncertainty and institutional herding

Abstract

Political uncertainty is a key determinant of investment decisions. Specifically, the uncertainty that surrounds government policy makes beliefs noisier and depresses stock prices. In this paper, we explore whether institutional investors herd, i.e., mimic each other's trades, in response to political uncertainty. Using U.S. institutional investors' quarterly holding data from 1985 through 2019, we find evidence consistent with our conjecture. We also find that the results are stronger in times of low presidential popularity, and among companies that are politically sensitive. Overall, the findings suggest that the effect of political uncertainty on financial markets is larger than previously thought.