Stock Market Volatility around National Elections

EFA 2006 Zurich Meetings Paper

20th Australasian Finance & Banking Conference 2007 Paper

European University Viadrina Postgraduate Research Programme Working Paper

30 Pages Posted: 18 Apr 2006 Last revised: 14 Apr 2008

See all articles by Jedrzej Pawel Bialkowski

Jedrzej Pawel Bialkowski

University of Canterbury - Department of Economics and Finance

Katrin Gottschalk

Auckland University of Technology - Business School - Department of Finance; European University Viadrina - Department of Finance and Capital Market Theory

Tomasz Piotr Wisniewski

Open University, UK

Date Written: October 2006

Abstract

This paper investigates a sample of 27 OECD countries to test whether national elections induce higher stock market volatility. It is found that the country-specific component of index return variance can easily double during the week around an election, which shows that investors are surprised by the election outcome. Several factors, such as a narrow margin of victory, lack of compulsory voting laws, change in the political orientation of the government, or the failure to form a government with parliamentary majority significantly contribute to the magnitude of the election shock. Furthermore, some evidence is found that markets with short trading history exhibit stronger reaction. Our findings have important implications for the optimal strategies of institutional and individual investors who have direct or indirect exposure to volatility risk.

Keywords: Political risk, National elections, Stock market volatility

JEL Classification: G11, G12, G14

Suggested Citation

Bialkowski, Jedrzej Pawel and Gottschalk, Katrin and Wisniewski, Tomasz Piotr, Stock Market Volatility around National Elections (October 2006). EFA 2006 Zurich Meetings Paper, 20th Australasian Finance & Banking Conference 2007 Paper, European University Viadrina Postgraduate Research Programme Working Paper, Available at SSRN: https://ssrn.com/abstract=892143 or http://dx.doi.org/10.2139/ssrn.892143

Jedrzej Pawel Bialkowski (Contact Author)

University of Canterbury - Department of Economics and Finance ( email )

Private Bag 4800
Christchurch, 8140
New Zealand

Katrin Gottschalk

Auckland University of Technology - Business School - Department of Finance ( email )

3 Wakefield Street
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Auckland Central 1020
New Zealand
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HOME PAGE: http://www.aut.ac.nz

European University Viadrina - Department of Finance and Capital Market Theory

Grosse Scharrnstr. 59
P.O. Box 1786
Frankfurt (Oder), 15230
Germany
++49-177-6624930 (Phone)

Tomasz Piotr Wisniewski

Open University, UK ( email )

Walton Hall
Milton Keynes, Buckinghamshire MK7 6AA
United Kingdom

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