Optimal Electoral Timing: Exercise Wisely and You May Live Longer

43 Pages Posted: 10 May 2006 Last revised: 5 Oct 2007

Jussi Keppo

National University of Singapore - NUS Business School

Lones Smith

University of Wisconsin at Madison - Department of Economics

Dmitry Davydov

Goldman Sachs Group, Inc. - Equities Risk Management

Date Written: October 3, 2007

Abstract

The timing of elections is flexible in many countries. We study this optimization, by first creating a Bayesian learning model of a mean-reverting political support process. We then explore optimal electoral timing, modeling it as a renewable American option with interacting waiting and stopping values. Inter alia, we show that the expected longevity is a convex-then-concave function of the support. Finally, we calibrate our model to the post 1945 Labour-Tory U.K. rivalry. Our story quite well explains when the elections were called. We also show that election options approximately double the expected time in power in the current streak.

Keywords: American option, optimal stopping

JEL Classification: D72, D81, G13

Suggested Citation

Keppo, Jussi and Smith, Lones and Davydov, Dmitry, Optimal Electoral Timing: Exercise Wisely and You May Live Longer (October 3, 2007). Cowles Foundation Discussion Paper No. 1565. Available at SSRN: https://ssrn.com/abstract=900460

Jussi Keppo (Contact Author)

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Lones Smith

University of Wisconsin at Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States
608-263-3871 (Phone)
608-262-2033 (Fax)

HOME PAGE: http://www.lonessmith.com

Dmitry Davydov

Goldman Sachs Group, Inc. - Equities Risk Management ( email )

One New York Plaza
New York, NY 10004
United States

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