Politics, Stock Markets, and Model Uncertainty

25 Pages Posted: 5 Sep 2007 Last revised: 23 Sep 2022

See all articles by K. Peren Arin

K. Peren Arin

Zayed University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Alexander Molchanov

Massey University

Otto F. Reich

Massey University

Date Written: May 11, 2011

Abstract

To the surprise of, in all likelihood, not only business journalists, the available evidence on the effects of political variables on both stock returns and volatility is scant and mixed. We investigate whether this weak and conflicting evidence may be due to limited sample sizes and too narrow a view of what constitutes politically relevant variables. We do so by analyzing a novel data set of political variables for 17 parliamentary democracies covering roughly the post-war period. The richness of the data set raises the issue of model uncertainty which we address with Bayesian Model Averaging. Our results show that the case for effects of political events on stock market volatility is stronger than the case for effects on stock market returns.

Keywords: Bayesian Model Averaging, Excess Returns, Model Uncertainty, Political Risk, Volatility

JEL Classification: C11, G11, G12

Suggested Citation

Arin, Kerim Peren and Molchanov, Alexander and Reich, Otto F., Politics, Stock Markets, and Model Uncertainty (May 11, 2011). Available at SSRN: https://ssrn.com/abstract=1010251 or http://dx.doi.org/10.2139/ssrn.1010251

Kerim Peren Arin

Zayed University ( email )

P.O. Box 4783
Abu Dhabi
United Arab Emirates

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Alexander Molchanov (Contact Author)

Massey University ( email )

Auckland
New Zealand

Otto F. Reich

Massey University ( email )

Auckland
New Zealand

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