The Price of Political Uncertainty: Theory and Evidence from the Option Market

Bryan Kelly, Lubos Pastor and Pietro Veronesi

No 19812, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We empirically analyze the pricing of political uncertainty, guided by a theoretical model of government policy choice. To isolate political uncertainty, we exploit its variation around national elections and global summits. We find that political uncertainty is priced in the equity option market as predicted by theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the price, variance, and tail risks associated with political events. This protection is more valuable in a weaker economy and amid higher political uncertainty. The effects of political uncertainty spill over across countries.

JEL-codes: G12 G15 G18 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-cfn and nep-pol
Note: AP CF EFG POL
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Citations: View citations in EconPapers (17)

Published as Bryan Kelly & Ľuboš Pástor & Pietro Veronesi, 2016. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," Journal of Finance, American Finance Association, vol. 71(5), pages 2417-2480, October.

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Related works:
Journal Article: The Price of Political Uncertainty: Theory and Evidence from the Option Market (2016)
Working Paper: The Price of Political Uncertainty: Theory and Evidence from the Option Market (2014)
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