Politics and equity markets: Evidence from Canada

Robert N. Killins, Thanh Ngo and Hongxia Wang

Journal of Multinational Financial Management, 2022, vol. 63, issue C

Abstract: We examine how political power, polarization, and economic policy uncertainty (EPU) in Canada and the US affect the Canadian equity market from 1985 to 2019. We document little evidence of significant liberal government return premiums and the corresponding risk for the overall market and many industry sectors. Only the IT sector witnesses the “second half effect” of election cycles. The Canadian equity market seems to outperform during strong Democratic control in the US, with mixed findings for the individual sectors. Political polarization in the two countries and trade uncertainty have little impact on Canadian equity returns except for the venture, small-cap, and IT sectors from the US polarization. The US EPU index affects the average returns of the overall Canadian equity market and the energy, industrials, retail, and transportation industries, while domestic EPU in Canada reduces the overall equity market, small-cap, and venture firm returns. The alignment of political ideology in the two countries has little impact on the equity market in Canada. Collectively, the results show that the impact of political environments on the Canadian equity market tends to be limited, dynamic, and industry-specific, suggesting that investors should not blindly mix their portfolios with their political views or affiliations.

Keywords: Politics; Uncertainty; Polarization; Balance of power; Equity market (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G15 G19 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:63:y:2022:i:c:s1042444x21000499

DOI: 10.1016/j.mulfin.2021.100726

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