Democratic Processes and Financial Markets: Pricing Politics

by William Bernhard , David Leblang

• ISBN13: 9780521861229
• ISBN10: 0521861225
• Edition: 1st
• Format: Hardcover
• Copyright: 2006-07-24
• Publisher: Cambridge University Press

Summary

The authors examine the conditions under which democratic events, including elections, cabinet formations, and government dissolutions, affect asset markets. Where these events have less predictable outcomes, market returns are depressed and volatility increases. In contrast, where market actors can forecast the result, returns do not exhibit any unusual behavior. Further, political expectations condition how markets respond to the political process. When news causes market actors to update their political beliefs, market actors reallocate their portfolios, and overall market behavior changes. To measure political information, Professors Bernhard and Leblang employ sophisticated models of the political process. They draw on a variety of models of market behavior, including the efficient markets hypothesis, capital asset pricing model, and arbitrage pricing theory, to trace the impact of political events on currency, stock, and bond markets. The analysis will appeal to academics, graduate students, and advanced undergraduates across political science, economics, and finance.

Table of Contents

Acknowledgments	ix
Introduction	1	(16)
Democratic Processes and Political Risk: Evidence from Foreign Exchange Markets	17	(32)
When Markets Party: Stocks, Bonds, and Cabinet Formations	49	(37)
The Cross-National Financial Consequences of Political Predictability	86	(17)
Cabinet Dissolutions and Interest Rate Behavior	103	(35)
Bargaining and Bonds: The Process of Coalition Formation and the Market for Government Debt in Austria and New Zealand	138	(32)
Time, Shares, and Florida: The 2000 Presidential Election and Stock Market Volatility	170	(28)
Polls and Pounds: Exchange Rate Behavior and Public Opinion in Britain	198	(27)
Conclusion: Political Predictability and Financial Market Behavior	225	(12)
References	237	(18)
Index	255