The U.S. Presidential Election 2012/2016 and Investors’ Sentiment: The Case of CBOE Market Volatility Index

Imlak Shaikh

doi:10.1177/2158244019864175

Abstract

Given that political events have substantial effect on new economic policies and economic performance of the country, this article aims to examine the behavior of the investors’ sentiment in terms of implied volatility index trailed by the U.S. presidential elections. The study empirically tests whether the presidential elections in 2012/2016 do contain the important market inclusive information to explain the expected stock market volatility. The findings indicate that investors’ concern was distracted around the presidential elections window, albeit the market performed identically in both the presidential election years. The significant fall in the implied volatility level (post-election period) is the calm before the storm, just wait and watch. The positive estimate uncovers the fact that investor worries were higher before the election day. In particular, the significant estimate of the presidential election debate shows that investors do regard the minutes of the presidential election debates in their portfolio selection. At the two elections era, on the candidacy of both the parties, the empirical result speaks marginally contrasting outcomes and falsifies the presidential election cycle hypothesis of past 29 U.S. election years. Empirical estimates conclude that the presidential elections in 2012/2016 have a strong, significant relationship with investor’s sentiment and stock market performance.

Highlights

The U.S presidential elections of 2012/2016 are the two major political events, which explain the key aspects of the political debates and future of the U.S economy
One can say that CBOE volatility index (VIX) is the barometer of the investors’ concerns and continue to be more volatile on election stock markets (ESM)
The present work aims to explain the effects of the U.S presidential elections on the ESM in the form of investor sentiment index

Summary

Introduction

The U.S presidential elections of 2012/2016 are the two major political events, which explain the key aspects of the political debates and future of the U.S economy. The stock markets’ inefficiency and volatility occur due to political and economic ambiguity. The S&P Capital IQ reports that presidential election cycles (PECs) have significant economic and behavioral consequences for the stock markets. For the 44th presidential election, nominations were Barack Obama and Mitt Romney from Democratic and Republican parties, respectively. Obama was leading with the electoral votes of 332 before Romney. The political campaigns focused on domestic concerns such as the great recession, social insurance, job creations, foreign policy, and the Affordable Care Act. The elections campaign debated on the Iraq war, military spending, and counter-terrorism. The 45th presidential elections’ nominations were Hillary Clinton and Donald Trump. Trump defeated Clinton with 304 electoral votes. Clinton focused on inclusive capitalism, Affordable Care Act, raising middle-class income. Trump’s campaign was toward making America great again and controlling over free trade deals, social security benefits, and corporate tax ease

Objectives

Results

Conclusion