U.S. Presidential Elections and Implied Volatility: The Role of Political Uncertainty
34 Pages Posted: 4 Mar 2012 Last revised: 1 Nov 2013
Date Written: August 13, 2012
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: Suggested Citation