Does partisan conflict predict a reduction in US stock market (realized) volatility? Evidence from a quantile-on-quantile regression model☆

Rangan Gupta, Christian Pierdzioch, Refk Selmi and Mark Wohar ()

The North American Journal of Economics and Finance, 2018, vol. 43, issue C, 87-96

Abstract: Theory suggests that partisan conflict negatively affects the possibility of economic policy change, implying that financial markets tend to operate under lower policy risk. Given that stock-return volatility measures risk, if the gridlock argument holds, stock–market volatility should be lower under divided than under a unified government. Using a partisan conflict index (PCI), we empirically confirm this theoretical argument for the U.S. stock market based on quantiles-based regressions. In particular, quantile-on-quantile regressions show that PCI tends to predict reduced volatility, with the effect being stronger at levels of volatility that are moderately low (i.e., below the median, but not at its extreme) for an increase in the predictor, especially with moderately low and high initial values (i.e., when PCI is at quantiles around the median).

Keywords: Partisan conflict; Realized volatility; Quantile regressions (search for similar items in EconPapers)
JEL-codes: C22 E60 G15 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:43:y:2018:i:c:p:87-96

DOI: 10.1016/j.najef.2017.10.006

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