Do Markets Punish Left Governments?

Abstract

The political economy literature finds that stock markets drop after left-wing and increase after right-wing electoral victories. This study shows that the size of this reaction strongly depends on the political constraints that the incoming government faces. When constraints are high, the discretion of governments to implement their preferred policies is low, which implies that election outcomes are less relevant for financial investors. The analysis of an original dataset of stock market reactions to 205 elections since the 1950s confirms this conjecture. Stocks drop considerably after the election of a left government and increase after the election of a right government, but only in low-constraints countries. These partisan effects on stocks are highly persistent and even become stronger over time when additional information about the composition of the incoming government becomes available. However, the effects of elections on stocks fully disappear when political constraints are high

Comparative politics and quasi-rational markets

“…Indeed, the existing literature on financial markets and elections presents arguments about how differences in political institutions can explain variations in uncertainty about, and associated with, market volatility (Hays et al 2003: 209-10, Bernhard and Leblang 2006, Goldbach and Fahrholz 2011, Philips 2014. Earlier research on the impact of partisanship (Herron 2000) has been supplemented by research which shows that institutions mediate the impact of partisan shifts (Bechtel 2009, Campello 2013, Sattler 2013. This is consistent with other strands of political economy research that emphasise the importance of credible commitments by policy-makers (North and Weingast 1989, Hallerberg et al 2009, Saeigh 2009, Breen and McMenamin 2013.…”

The Effect of the Alternation in the Ruling Party on Three-Factor Risks and Returns in ETF: The Case of Presidential Elections in Taiwan

“…The results showed evidence of a positive abnormal return in the period two weeks before the election, and this positive excess return is more obvious when the current ruling party is turned out of office. As Sattler (2013) pointed out, the political economy literature supports the viewpoint that stock markets drop after a left-wing electoral victory and rise after a right-wing victory, and the strength of these outcomes is determined by political factors. As mentioned above, For this reason, this research proposes an improved three-factor model to account for changed conditions in investment performance due to changes in factor risks after major events occur.…”

US Political Shocks, Global Banks, and International Financial Markets: Evidence from the 2016 Presidential Election

“…Elections are among the main types of political events to elicit market reactions. As democratic turnover has the potential to affect returns to capital through shifts in the orientation of economic and regulatory policy, investors pay close attention to elections, trying to assess the probabilities of future policies and to form expectations of future returns (Sattler, 2013;Bechtel, 2009;Bernhard and Leblang, 2006). Political events in the United States, in particular, have the potential to affect investor behavior on a global scale.…”

“…Political economists have often resorted to local stock market indices to capture market expectations about national economic performance (e.g. Sattler, 2013;Mosley and Singer, 2008;Bernhard and Leblang, 2006;Jensen and Schmith, 2005). One of the advantages of using local stock market indices is the wider cross-national coverage compared to country ETFs, given that not every foreign stock market has its own dedicated ETF trading in a US stock exchange.…”

“…While it has been extensively shown that national elections affect outcomes in financial markets, existing work has largely focused on their impact on domestic markets (e.g. Bechtel, 2009;Sattler, 2013;Bernhard and Leblang, 2006;Leblang and Mukherjee, 2005; though see Bernhard and Leblang, 2006, Ch. 4).…”