Partisan Politics and Stock Market Performance: The Effect of Expected Government Partisanship on Stock Returns in the 2002 German Federal Election

30 Pages Posted: 28 Feb 2007 Last revised: 29 May 2013

Roland Füss

University of St. Gallen - School of Finance

Michael M. Bechtel

Washington University in Saint Louis

Abstract

Partisan theory and extant evidence from parties' ideal policies suggest firms to perform better under right - than under left-leaning governments. If investors anticipate these effects of different parties holding office, changes in expected government partisanship should produce distinct patterns of stock market performance, with prices reflecting the electoral prospects of the competing parties in the pre-election time. This is the first study which investigates such anticipated effects of expected government partisanship on stock market performance in Germany. In accordance with rational partisan models of government we assume that increasing public support for the left- (right) leaning party coalition should result in decreasing (increasing) stock market performance. We analyze the effect of expected government partisanship on small firms in the 2002 German federal election employing GARCH(1,1) and TARCH(1,1) volatility models. The empirical evidence shows that overall stock performance of small German firms was positively (negatively) linked to the probability of a right-leaning (left-leaning) coalition winning the election. Moreover, we find increasing electoral prospects of a right-leaning coalition to trigger volatility increases while electoral uncertainty has a volatility reducing effect. The findings carry implications for parties' future economic policies and show possibilities for further research.

Keywords: Government partisanship, stock market performance, elections, GARCH modeling, political information, price formation

JEL Classification: C12, G12, G38

Suggested Citation

Füss, Roland and Bechtel, Michael M., Partisan Politics and Stock Market Performance: The Effect of Expected Government Partisanship on Stock Returns in the 2002 German Federal Election. Public Choice, Vol. 135, No. 3-4, pp. 131-150. Available at SSRN: https://ssrn.com/abstract=921265

Roland Füss

University of St. Gallen - School of Finance ( email )

Rosenbergstrasse 52
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

Michael M. Bechtel (Contact Author)

Washington University in Saint Louis ( email )

Campus Box 1063
One Brookings Drive
Saint Louis, MO 63130-4899
United States

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