US Political Shocks, Global Banks, and International Financial Markets: Evidence from the 2016 Presidential Election

Abstract

What are the global financial spillovers from major political shocks in the United States? We analyze the response of international financial markets to the 2016 US presidential election. The surprise election outcome represents an exogenous shock that affords us a unique opportunity to estimate the effect of a partisan shift in the White House on third countries. Given Donald Trump’s unanticipated victory and his promises of financial deregulation, investors revised their return expectations for third countries according to countries’ exposure to the election shock. We argue that countries with dense financial ties to the US benefited from expectations of regulatory reform in Wall Street. We estimate the election effect on foreign equity markets using data on 134 single-country exchange-traded funds (ETFs) covering 48 developed and developing economies. Results show that the election had an overall negative effect on international markets, but countries with close ties to the US banking system fared better. We further test the mechanism with data on US global banks and find support for our hypothesis.

Keywords: US Presidential Election, Financial Regulation, International Financial Markets, Global Banks

JEL Classification: F30, F50, F68, G15, G18