How Do Sovereign Bond Investors Judge the Economic Performance of the Government?
69 Pages Posted: 23 Dec 2016
Date Written: December 22, 2016
This paper investigates how sovereign bond investors assess the performance of the government by investigating cumulative abnormal sovereign bond returns surrounding national elections. For a sample of 101 election events in 45 emerging markets, we find robust evidence for a positive market reaction if a poorly performing government is voted out of office. The primary fiscal balance appears to be the most important indicator of government performance to sovereign bond investors. In addition, the results are most pronounced if the new head of government has a strong mandate and is supported by a sound system of institutions and governance.
Keywords: Political risk, Sovereign bond returns, Elections, Government performance, Event study
JEL Classification: G12, G14, G15, H11, H62, H63
Suggested Citation: Suggested Citation