Politics, Stock Markets, and Model Uncertainty
25 Pages Posted: 5 Sep 2007 Last revised: 23 Sep 2022
Date Written: May 11, 2011
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: Suggested Citation