Skip to main content
SpringerLink
Log in

Can we insure against political uncertainty? Evidence from the U.S. stock market

  • Published:
Public Choice Aims and scope Submit manuscript

Abstract

I show that shares currently traded on U.S. stock markets can be used to hedge political uncertainty. Focusing on the 2000 U.S. presidential election, I construct two “presidential portfolios” composed of selected stocks anticipated to fare differently under a Bush versus a Gore presidency. To construct these portfolios I use data on campaign contributions by publicly traded corporations and identify the major contributors on each side. Using daily observations for the six months before the election took place, I show that the excess returns of these portfolios with respect to overall market movements are significantly related to changes in electoral polls.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Aizcorbe, A. M., Kennickell, A. B., & Moore, K. B. (2003). Recent changes in U.S. family finances: evidence from the 1998 and 2001 survey of consumer finances. Federal Reserve Bulletin,1.

  • Alvarez, R. M. (1998). Information and elections. Ann Arbor: University of Michigan Press.

    Google Scholar 

  • Ayers, B., Cloyd, C. B., & Robinson, J. R. (2005). Read my lips …: does the tax rhetoric of presidential candidates affect security prices? The Journal of Law and Economics, 48, 125–148.

    Article  Google Scholar 

  • Bailey, M. J. (1996). Implementation of the Thompson mechanism. Public Choice, 89, 231–243.

    Article  Google Scholar 

  • Bailey, M. J. (1997). Toward a new constitution for a future country. Public Choice, 90, 73–115.

    Article  Google Scholar 

  • Bertaut, C. C., & Starr-McCluer, M. (2002). Household portfolios in the United States. In L. Guiso, M. Haliassos, & T. Jappelli (Eds.), Household portfolios. Cumberland: MIT Press.

    Google Scholar 

  • Celentani, M., Conde-Ruiz, J. I., & Desmet, K. (2004). Endogenous policy leads to inefficient risk sharing. Review of Economic Dynamics, 7, 758–787.

    Article  Google Scholar 

  • Cutler, D. (1988). Tax reform and the stock market: an asset price approach. American Economic Review, 78, 1107–1117.

    Google Scholar 

  • Fisman, R. (2001). Estimating the value of political connections. American Economic Review, 91, 1095–1102.

    Google Scholar 

  • Forsythe, R., Nelson, F., & Wright, J. (1992). Anatomy of an experimental political stock market. American Economic Review, 82, 1142–1161.

    Google Scholar 

  • Herron, M. C., Lavin, J., Silver, J., & Cram, D. (1999). Measurement of political effects in the United States economy: a study of the 1992 presidential election. Economics & Politics, 31, 51–81.

    Article  Google Scholar 

  • Knight, B. G. (2007). Are policy platforms capitalized into equity prices? Evidence from the Bush/Gore 2000 presidential election. Journal of Public Economics, 91, 389–409.

    Article  Google Scholar 

  • Mattozzi, A. (2005). Policy uncertainty, electoral securities and redistribution. Working Paper, Caltech.

  • Musto, D. K., & Yilmaz, B. (2003). Trading and voting. Journal of Political Economy, 111, 990–1003.

    Article  Google Scholar 

  • Pantzalis, C., Stangeland, D. A., & Turtle, H. J. (2000). Political elections and the resolution of uncertainty: the international evidence. Journal of Banking and Finance, 24, 1575–1603.

    Article  Google Scholar 

  • Roberts, B. E. (1990). Political institutions, policy expectations, and the 1980 election: a financial market perspective. American Journal of Political Science, 34, 289–310.

    Article  Google Scholar 

  • Santa-Clara, P., & Valkanov, R. (2003). The presidential puzzle: political cycles and the stock market. Journal of Finance, 58, 1841–1872.

    Article  Google Scholar 

  • Sinai, T., & Gyourko, J. (2004). The asset price incidence of capital gains taxes: evidence from the taxpayer relief act of 1997 and publicly-traded real estate firms. Journal of Public Economics, 88, 1543–1565.

    Article  Google Scholar 

  • Thompson, E. A. (1966). A Pareto optimal group decision process. In G. Tullock (Ed.), Papers on non-market decision making. Charlottesville: University of Virginia.

    Google Scholar 

  • Thompson, E. A. (1967). A reply. Public Choice, 1, 109–112.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Division of the Humanities and Social Sciences, California Institute of Technology, 1200 East California Blvd., Pasadena, CA, 91125, USA

    Andrea Mattozzi

Authors
  1. Andrea Mattozzi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Andrea Mattozzi.

Additional information

This paper is a chapter of my doctoral dissertation at the University of Pennsylvania. I am grateful to Mike Alvarez, Bob Inman, Rod Kiewiet, Preston McAfee, Andrew Postlewaite, Frank Schorfheide, and in particular to Antonio Merlo for their comments. I am indebted to Celso Brunetti, Alessio Caldarera, Marco Cozzi, Daniela Iorio, and two anonymous referees for helpful suggestions. All usual disclaimers apply.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Mattozzi, A. Can we insure against political uncertainty? Evidence from the U.S. stock market. Public Choice 137, 43–55 (2008). https://doi.org/10.1007/s11127-008-9311-0

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11127-008-9311-0

Keywords

JEL Classification

Search

Navigation