Politics and Volatility

Maria Boutchkov, Hitesh Doshi, Art Durnev and Alexander Molchanov

No 2008-10, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: We investigate how politics (party orientation, national elections, and strength of democratic institutions) affect stock market volatility. We hypothesize that labor-intensive industries, industries with larger exposure to foreign trade, industries whose operations require efficient contracts, and industries susceptible to government expropriation are more sensitive to changes in political environment. Using a large panel of industry-country-year observations, we show that politically-sensitive industries exhibit higher volatilities during national elections. Volatility is also higher for labor-intensive industries under leftist governments. Moreover, governance-sensitive industries and industries under a higher risk of expropriation are more volatile when democratic institutions are weak. The rise in volatility is driven largely by systematic risk rather than firm-specific risk. The results are consistent with the 'peso problem' hypothesis that uncertainty about future government policies can increase stock market volatility.

Pages: 46 pages
Date: 2008-04
New Economics Papers: this item is included in nep-cdm and nep-pol
Note: November 14, 2007, Preliminary and incomplete
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitcei:2008-10

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