Working Paper: NBER ID: w19812
Authors: Bryan Kelly; Lubos Pastor; Pietro Veronesi
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G12; G15; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political Uncertainty (D89) | Option Prices (G13) |
| Weaker Economic Conditions (F69) | Option Prices (G13) |
| Electoral Outcome Uncertainty (D79) | Option Prices (G13) |
| Political Uncertainty (D89) | International Markets (F19) |