Divided Governments and Futures Prices

Abstract

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