Democracy and Stock Market Returns

56 Pages Posted: 2 Jul 2018 Last revised: 25 Jul 2022

See all articles by Xun Lei

Xun Lei

University of Northampton

Tomasz Piotr Wisniewski

Open University, UK

Date Written: June 19, 2018


This paper examines the relationship between the level of democratization and stock index returns in a sample of 74 countries. Compared with democracies, autocratic states are characterized by lower returns despite exhibiting higher return volatility. Even though this higher volatility can be mostly attributed to diversifiable country-specific risk, the Capital Asset Pricing Model is unable to explain the return differential. Instead, it is the level of investor protection that can fully account for the phenomenon described here. Autocratic leaders are reluctant to promulgate regulation shielding investors and the resultant risk of expropriation depresses the returns realized by outsiders.

Keywords: Stock Returns, Political Regimes, Democracy, Autocracy, Investor Protection

JEL Classification: G12, P16

Suggested Citation

Lei, Xun and Wisniewski, Tomasz Piotr, Democracy and Stock Market Returns (June 19, 2018). Available at SSRN: or

Xun Lei

University of Northampton ( email )

Waterside Campus
University Drive
Northampton, NN1 5PH
United Kingdom

Tomasz Piotr Wisniewski (Contact Author)

Open University, UK ( email )

Walton Hall
Milton Keynes, Buckinghamshire MK7 6AA
United Kingdom

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