Global Political Uncertainty and Asset Prices
Review of Financial Studies, Vol. 33, No. 4, 1737–1780, 2020
86 Pages Posted: 30 Aug 2014 Last revised: 23 Jun 2020
Date Written: August 9, 2019
We show that global political uncertainty, measured by the U.S. election cycle, on average, leads to a fall in equity returns in fifty non-U.S. countries. At the same time, market volatilities rise, local currencies depreciate, and sovereign bond returns increase. The effect of global political uncertainty on equity prices increases with the level of uncertainty in U.S. election outcomes and a country’s equity market exposure to foreign investors, but does not vary with the country’s international trade exposure. These findings suggest that global political uncertainty increases investors’ aggregate risk aversion, leading to a flight to safety.
Keywords: Political uncertainty, asset prices, risk-aversion, flight-to-safety, international finance
JEL Classification: F30, F36, G12, G15, G18
Suggested Citation: Suggested Citation