U.S. Presidential Elections and Implied Volatility: The Role of Political Uncertainty

34 Pages Posted: 4 Mar 2012 Last revised: 1 Nov 2013

See all articles by John W. Goodell

John W. Goodell

University of Akron - Department of Finance, College of Business Administration

Sami Vähämaa

University of Vaasa

Date Written: August 13, 2012

Abstract

This paper focuses on the effects of political uncertainty and the political process on implied stock market volatility during U.S. presidential election cycles. Using monthly Iowa Electronic Markets data over five elections, we document that stock market uncertainty, as measured by the VIX volatility index, increases along with positive changes in the probability of success of the eventual winner. The association between implied volatility and the election probability of the eventual winner is positive even after controlling for changes in overall election uncertainty. These findings indicate that the presidential election process engenders market anxiety as investors form and revise their expectations regarding future macroeconomic policy.

Keywords: Presidential elections, political uncertainty, implied volatility, VIX

JEL Classification: E60, E65, G10, G13, G14, G18

Suggested Citation

Goodell, John W. and Vähämaa, Sami, U.S. Presidential Elections and Implied Volatility: The Role of Political Uncertainty (August 13, 2012). Journal of Banking and Finance, Vol. 37, No. 3, pp. 1108–1117, 2013. Available at SSRN: https://ssrn.com/abstract=2014823 or http://dx.doi.org/10.2139/ssrn.2014823

John W. Goodell (Contact Author)

University of Akron - Department of Finance, College of Business Administration ( email )

259 S. Broadway
Akron, OH 44325
United States

Sami Vähämaa

University of Vaasa ( email )

P.O. Box 700
Vaasa, FI-65101
Finland
+358 29 449 8455 (Phone)

HOME PAGE: http://www.uva.fi/~sami

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