Global Political Uncertainty and Asset Prices

Abstract

We show that global political uncertainty, measured by the U.S. election cycle, leads to a fall in equity market returns in 50 non-U.S. countries. At the same time, equity 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 causes an increase in investors’ aggregate risk aversion, leading to a flight to safer assets.

Keywords: Political uncertainty, asset prices, integration, international finance

JEL Classification: F30, F36, G12, G15, G18