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The Price of Political Uncertainty: Theory and Evidence from the Option Market

The Journal of finance (New York), 2016-10, Vol.71 (5), p.2417-2480 [Peer Reviewed Journal]

2016 American Finance Association ;2016 the American Finance Association ;Copyright Blackwell Publishers Inc. Oct 2016 ;ISSN: 0022-1082 ;EISSN: 1540-6261 ;DOI: 10.1111/jofi.12406 ;CODEN: JLFIAN

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  • Title:
    The Price of Political Uncertainty: Theory and Evidence from the Option Market
  • Author: KELLY, BRYAN ; PÁSTOR, ĽUBOŠ ; VERONESI, PIETRO
  • Subjects: Economic conditions ; Economic models ; Economic uncertainty ; Gross domestic product ; Options markets ; Political risk ; Price volatility ; Prices ; Public policy ; Statistical variance ; Studies ; Summit meetings ; Uncertainty
  • Is Part Of: The Journal of finance (New York), 2016-10, Vol.71 (5), p.2417-2480
  • Description: We empirically analyze the pricing of political uncertainty, guided by a theoretical model of government policy choice. To isolate political uncertainty, we exploit its variation around national elections and global summits. We find that political uncertainty is priced in the equity option market as predicted by theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the price, variance, and tail risks associated with political events. This protection is more valuable in a weaker economy and amid higher political uncertainty. The effects of political uncertainty spill over across countries.
  • Publisher: Cambridge: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0022-1082
    EISSN: 1540-6261
    DOI: 10.1111/jofi.12406
    CODEN: JLFIAN
  • Source: Alma/SFX Local Collection
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