Manifestations of Political Uncertainty around US Presidential Elections: Cross-Sectional Evidence from the Option Market

68 Pages Posted: 7 Jun 2019

See all articles by Alexandros Kostakis

Alexandros Kostakis

University of Liverpool Management School; University of Manchester - Manchester Business School

Konstantinos Gkionis

UBS

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Date Written: May 20, 2019

Abstract

This study examines the effects of political uncertainty around US presidential elections on firm risk, expected return, trading activity, and dispersion of investor beliefs. To this end, we utilize information embedded in short-term options and exploit cross-sectional differences in firms' political features, such as their sensitivity to economic policy uncertainty, their stock returns' exposure to the presidential party, their geographical political alignment with the presidential party, and their political connectedness through campaign contributions. In addition to significant aggregate effects across firms due to political uncertainty, we find that sensitive, exposed, and aligned firms exhibit a substantially higher degree of option-implied price and tail risk, command a higher premium, and feature an increased dispersion of investor beliefs around the presidential election day.

Keywords: Political Uncertainty; US Presidential Election; Firm Risk and Return; Trading Activity; Dispersion of Beliefs; Option-Implied Information

Suggested Citation

Kostakis, Alexandros and Gkionis, Konstantinos and Stathopoulos, Konstantinos, Manifestations of Political Uncertainty around US Presidential Elections: Cross-Sectional Evidence from the Option Market (May 20, 2019). Available at SSRN: https://ssrn.com/abstract=3391544 or http://dx.doi.org/10.2139/ssrn.3391544

Alexandros Kostakis (Contact Author)

University of Liverpool Management School ( email )

Chatham Building
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://www.alexkostakis.com

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Konstantinos Gkionis

UBS ( email )

5 Broadgate
London, EC2M 2QS
United Kingdom

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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