Divided Governments and Futures Prices
29 Pages Posted: 12 May 2013 Last revised: 5 Sep 2016
Date Written: April 1, 2013
This paper investigates the effect of divided governments on asset prices. For identification, we use changes in the implied probability of a divided government while votes are being counted. Using high frequency data from the betting market and U.S. overnight futures market, we estimate a 1.4% decrease in the S&P 500 futures in the election event of a divided government. Results are similar for the 2010 U.K. election. Further analysis shows that divided government affects expected stock returns through the mechanism of policy uncertainty.
Keywords: Divided government, elections, expected returns, policy uncertainty, prediction markets
JEL Classification: D72, E6, G12, G13, G14
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