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Election uncertainty, economic policy uncertainty and financial market uncertainty: A prediction market analysis

John W. Goodell, Richard J. McGee and Frank McGroarty

Journal of Banking & Finance, 2020, vol. 110, issue C

Abstract: We examine the relationship between election uncertainty, economic policy uncertainty, and financial market uncertainty in a prediction-market analysis, covering seven US presidential election campaigns. We argue theoretically that changes in the incumbent party re-election probability should be a key driver of changes in policy uncertainty. Consistent with this theory, we find that a large portion of changes in financial uncertainty in the final stages of election campaign seasons is explained by changes in the probability of the incumbent party getting re-elected. Our findings suggest that the incumbent-party election probability, derived from prediction markets, is an important measure of economic policy uncertainty in the days leading up to US elections.

Keywords: Political uncertainty; Economic policy uncertainty; Financial uncertainty; Election uncertainty; Prediction markets (search for similar items in EconPapers)
JEL-codes: E65 G10 G13 G18 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jbankfin.2019.105684

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