Is heightened political uncertainty priced in stock returns? Evidence from the 2014 Scottish independence referendum

Julia Darby, Jun Gao, Siobhán Lucey and Sheng Zhu
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Jun Gao: Department of Economics, University College Cork, Ireland
Sheng Zhu: Department of Economics and Centre for Investment Research, University College Cork, Ireland

No 1913, Working Papers from University of Strathclyde Business School, Department of Economics

Abstract: We contribute to a growing literature on economic and financial impacts of political uncertainty by assessing whether heightened uncertainty associated with an important political event is priced into stock returns. Our particular study looks at the period surrounding the 2014 Scottish Independence Referendum, although we argue that our approach and findings have wider relevance to assessing impacts of other political events, including Brexit. Using company data and portfolio-level analysis we document significant variation in returns and demonstrate that uncertainty betas help predict the cross-sectional dispersion of returns. These findings are robust to inclusion of controls (standard risk factors), but no longer hold when a Scottish specific uncertainty measure is replaced with UK-wide measures of either economic policy uncertainty or stock market uncertainty, adding support to the hypothesis that our findings are driven by referendum related uncertainty. We conclude that heightened political uncertainty was priced during the period surrounding the referendum, i.e. that uncertainty averse investors succeeded in gaining compensation for holding the volatile stocks of Scottish headquartered companies.

Keywords: Political uncertainty; stock market volatility (search for similar items in EconPapers)
JEL-codes: E65 G12 G18 P16 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2019-09
New Economics Papers: this item is included in nep-mac, nep-pol and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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