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The economic record of the government and sovereign bond and stock returns around national elections

Stefan Eichler and Timo Plaga

Journal of Banking & Finance, 2020, vol. 118, issue C

Abstract: This paper investigates the role of the fiscal and economic record of the incumbent government in shaping the price response of sovereign bonds and stocks to the election outcome in emerging markets and developed countries. For sovereign bonds in emerging markets, we find robust evidence for higher cumulative abnormal returns (CARs) if a government associated with a relatively low primary fiscal balance is voted out of office compared to elections where the fiscal balance was relatively high. This effect of the incumbent government's fiscal record is significantly more pronounced in the presence of high sovereign default risk and strong political veto players, whereas the quality of institutions does not explain differences in effects for different events. We do not find robust effects of the government's fiscal record for developed countries and stocks.

Keywords: Fiscal balance; Political risk; Sovereign bond returns; Stock returns; Elections; Event study; Emerging markets; Developed countries (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 H11 H62 H63 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jbankfin.2020.105832

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