, Volume 137, Issue 1-2, pp 43-55
Date: 22 Apr 2008

Can we insure against political uncertainty? Evidence from the U.S. stock market

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Abstract

I show that shares currently traded on U.S. stock markets can be used to hedge political uncertainty. Focusing on the 2000 U.S. presidential election, I construct two “presidential portfolios” composed of selected stocks anticipated to fare differently under a Bush versus a Gore presidency. To construct these portfolios I use data on campaign contributions by publicly traded corporations and identify the major contributors on each side. Using daily observations for the six months before the election took place, I show that the excess returns of these portfolios with respect to overall market movements are significantly related to changes in electoral polls.

This paper is a chapter of my doctoral dissertation at the University of Pennsylvania. I am grateful to Mike Alvarez, Bob Inman, Rod Kiewiet, Preston McAfee, Andrew Postlewaite, Frank Schorfheide, and in particular to Antonio Merlo for their comments. I am indebted to Celso Brunetti, Alessio Caldarera, Marco Cozzi, Daniela Iorio, and two anonymous referees for helpful suggestions. All usual disclaimers apply.