POLITICS AND THE MARKETS: EVIDENCE FROM INTERNATIONAL EQUITY

Abstract

Since governments exert strong influence in daily economic life, uncertainty induced by government action or inaction may have implications on financial markets. This paper distinguishes between policy uncertainty, political uncertainty and sentiment, and election uncertainty. Using newspaper searches and extensive text analysis, I examine the influence of these sources of uncertainty on 22 international stock markets between 1989 and 2013. I find that only policy uncertainty has a statistically significant impact on stock market returns, although its effect is insignificant in economic terms. However, all four variables are individually and jointly significant in explaining stock market volatility, with policy uncertainty having the largest impact in economic terms.