The Real-Time Impact of Political Risk on Market Valuations: Evidence from Peru

Juan Pablo Micozzi, Patricio Navia, Pablo Pinto and Sebastian Saiegh ()
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Juan Pablo Micozzi: Department of Political Science, Instituto Autonomo Tecnologico de Mexico (ITAM), Ciudad de Mexico 01080, Mexico
Patricio Navia: School of Liberal Studies, New York University, New York, NY 10003, USA
Pablo Pinto: Hobby School of Public Affairs, University of Houston, Houston, TX 77204, USA
Sebastian Saiegh: Department of Political Science, University of California San Diego, La Jolla, CA 92037, USA

JRFM, 2024, vol. 17, issue 7, 1-15

Abstract: This study examines the impact of political risk on financial markets by leveraging high-frequency (minute-by-minute) price data and precise event timestamps from media outlets’ Twitter feeds during Pedro Castillo’s failed coup attempt in Peru. Unlike previous research that relies on low-frequency data and protracted political changes, our analysis demonstrates that daily closing prices may misleadingly suggest negligible impact. In contrast, high-frequency data reveal that markets promptly and accurately incorporated news of the coup attempt and, in turn, its failure into asset prices. Our analysis shows that breakdowns in democratic governance negatively affect asset prices, while the restoration of the rule of law, in the form Congressional checks on the Executive branch, boosts them. Moreover, our analyses suggest that domestic companies and sectors with less mobile assets are more vulnerable to these political risks. Our findings underscore the crucial role of high-frequency data in accurately capturing how institutions and political risk affects equity markets.

Keywords: political risk; financial markets; high-frequency data; Peru (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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