Political Uncertainty and Household Stock Market Participation
AFA 2019 Annual Meeting Paper
58 Pages Posted: 10 Nov 2017 Last revised: 25 Feb 2019
Date Written: February 2019
Using a unique micro-level panel data set, we study the effect of political uncertainty on household stock market participation. We find that households significantly reduce their participation and reallocate to safer assets during periods of increased political uncertainty preceding gubernatorial elections. The decline in participation is related to households’ response to elevated asset risk and their incentive to hedge increased labor income risk. In situations where uncertainty remains high after elections, pre-election drops in participation are only partially reversed, reflecting prolonged distortion in household stock investments. Such a distortion can have implications for households, firms, and the economy in general.
Keywords: Household Finance, Income Risk, Political Uncertainty, Portfolio Choice, Stock Market Participation
JEL Classification: D14, G11, G18
Suggested Citation: Suggested Citation