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

31 Pages Posted: 13 Feb 2018

See all articles by Raphael Cunha

Raphael Cunha

Princeton University - Woodrow Wilson School of Public and International Affairs

Andreas Kern

Georgetown University - McCourt School of Public Policy

Date Written: January 31, 2018

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

Suggested Citation

Cunha, Raphael and Kern, Andreas, US Political Shocks, Global Banks, and International Financial Markets: Evidence from the 2016 Presidential Election (January 31, 2018). Available at SSRN: https://ssrn.com/abstract=3116303 or http://dx.doi.org/10.2139/ssrn.3116303

Raphael Cunha

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

Andreas Kern (Contact Author)

Georgetown University - McCourt School of Public Policy ( email )

37 and O Streets, NW
Old North, Suite 413
Washington, DC 20057
United States

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