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Stock markets in turmoil: political institutions and the impact of elections
Author(s) -
Lausegger Martin
Publication year - 2021
Publication title -
economics and politics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.822
H-Index - 45
eISSN - 1468-0343
pISSN - 0954-1985
DOI - 10.1111/ecpo.12169
Subject(s) - predictability , proportional representation , economics , credibility , electoral system , stock (firearms) , stock market , politics , general election , representation (politics) , political economy , monetary economics , financial economics , political science , law , democracy , mechanical engineering , paleontology , physics , horse , quantum mechanics , biology , engineering
This paper explores how elections impact stock markets across diverse political institutions. I argue that electoral and party systems impact the fragmentation, credibility, and predictability of electoral information, influencing levels of uncertainty resolved by elections and leading to distinct stock market reactions. First, elections in majoritarian electoral systems produce larger cumulative abnormal returns (CARs) than elections in proportional representation systems. Second, the weaker institutionalized a party systems is, the larger are the CARs around elections. Third, these two institutional variables interact. Elections in majoritarian (proportional representation) systems with weak (strong) party system institutionalizations will have particularly large (small) CARs. I formally derive these propositions, conduct event studies of the impact of 87 elections on SMs in 21 countries from 1999 to 2016, and analyze four case studies.