The Stock and CDS Market Consequences of Political Uncertainty: The Arab Spring

Abstract

ABSTRACT We investigate how political unrest affects asset prices in the context of the Arab Spring. Abnormal returns in the major stock-market indices of Arab Spring countries average −1.1% on key days of Arab Spring and abnormal changes in credit default spreads average 1.4%. There is significant reaction to region wide as well as local protests indicating a spillover with protests in neighboring countries affecting investors’ perception of local political instability and the pricing of assets. Once protests start locally, investors start paying more attention to what is happening at home than in the region. The significant stock market reaction to region-wide protests in Arab Spring countries indicates a spill-over where investors price an increase in the probability of political turmoil in one country when there are protests in neighboring countries. The decline in stock market indices coupled with the increase in credit default spreads indicates that investors anticipate and ex-ante price how current political uncertainty will affect firm value.