Political instability and stock market returns: Evidence from OECD countries
This paper examines the relationship between political instability and stock market returns using quarterly time series data from 1993 to 2013. In this paper, stock market returns are defined as the returns of the general stock market index and banking index for 18 OECD countries. Five different political instability indicators are constructed in order to measure political uncertainty. The empirical part utilizes the EFA, PCA and GARCH-M methodologies. The findings indicate a direct and an indirect impact between the PI indicators and the returns of the Banking Index and the Overall Stock Market Index. The research contributes to the literature by providing empirical evidence to policy makers on the effects that political instability has on stock markets.
Aisen, A. and Veiga, F.J. (2013) How does political instability affect economic growth?, European Journal of Political Economy 29, 151-167
Alesina, A., Perotti, R. (1996) Income distribution, political instability, and investment, European Economic Review 40(6), 1203–1228.
Antonakakis, N., Chatziantoniou, I., Filis, G. (2013) Dynamic co-movements of stock market returns, implied volatility and policy uncertainty, Economic Letters, 120, 87–92.
Asteriou, D. and Price, S. (2001) Political instability and economic growth: UK time series evidence, Scottish Journal of Political Economy 48, 383–399.
Bollerslev, T. (1986) Generalized Autoregressive Conditional Heteroskedasticity, Journal of Econometrics, 31, 307-327.
Bussiere, M. and Mulder, C. (1999) Political instability and economic vulnerability, IMF Working Papers, No. 9946.
Chesney, M., Reshetarb, G., Karamana, M. (2011) The impact of terrorism on financial markets: an empirical study, Journal of Banking and Finance 35(2), 253–267.
Diamonte, R.L., Liew, J.M., Stevens, R.L. (1996) Political risk in emerging and developed markets, Financial Analysts Journal 52(3), 71-76.
Enders, W. (1995) Applied econometric time series, New York: Wiley
Engle, R. F., Lilien, D. M., and Robins, R. P. (1987) Estimating Time Varying Risk Premia in the Term Structure: The ARCH -M Model, Econometrica, March, 55, 391–407.
Fabriger, L.R. and Wegener, D.T. (2011) Exploratory Factor Analysis Understanding Statistics, Oxford University Press: New York.
Gemmill, G., (1992) Political risk and market efficiency: tests based in British stock and options markets in the 1987 election, Journal of Banking and Finance 16, 211–231.
Huang, T., Wu, Fei, Yu, Jing and Zhang, Bohui (2015), International political risk and government bond pricing, Journal of Banking & Finance 55, 393-405.
Jackson, A.O. (2008) The impact of the 9/11 terrorist attacks on the US economy, Florida Memorial University, Working paper.
Jong-a-Pin, R. (2009) On the measurement of political instability and its impact on economic growth, European Journal of Political Economy 25, 15–29.
Ko, J.H. and Lee, C.M. (2015) International economic policy uncertainty and stock prices: Wavelet approach, Economic Letters 134, 118-122.
Lehkonen, H. and Heimonen, K. (2015) Democracy, political risks and stock market performance, Journal of International Money and Finance 59, 77-99.
Li, J., Born, J.A. (2006) Presidential election uncertainty and common stock returns in the United States, Journal of Financial Research 29, 609–622.
Smales, A. Lee (2014) Political uncertainty and financial market uncertainty in an Australian context, Journal of International Financial Markets, Institutions and Money 32, 415-435.
How to Cite
The works published in this journal are subject to the following terms:
1. Oviedo University Press (the publisher) retains the property rights (copyright) of published works, and encourages and enables the reuse of the same under the license specified in paragraph 2.
© Ediuno. Ediciones de la Universidad de Oviedo / Oviedo University Press
2. The works are published in the online edition of the journal under a Creative Commons Attribution-Non Commercial-Non Derives 3.0 Spain (legal text). You can copy, use, distribute, transmit and publicly display, provided that: i) you cite the author and the original source of publication (journal, publisher and URL of the work), ii) they are not used for commercial purposes, iii) mentions the existence and specifications of this license.
3. Conditions of self-archiving. The author can archive the post-print version of the article (publisher’s version) on the author’s personal website and/or on the web of the institution where he belong, including a link to the page of the journal and putting the way of citation of the work. Economics and Business Letters and its URL https://reunido.uniovi.es/index.php/EBL/index are the only authorized source for correctly giving the reference of the publisher’s version in every mention of the article.