TL;DRAbstract
The outcomes of democratic political events – which party will win the election, which parties will form the cabinet, who will become Prime Minister – are often predictable. When market actors can easily forecast the political outcome, we expect market behavior to remain relatively stable. On the other hand, when political outcomes are less predictable, market actors will shift their portfolios out of assets whose value is vulnerable to alternative government policies toward assets offering returns that are better insulated. Therefore, we expect returns to be relatively lower in these vulnerable markets during periods of pronounced political uncertainty.
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The outcomes of democratic political events – which party will win the election, which parties will form the cabinet, who will become Prime Minister – are often predictable. When market actors can easily forecast the political outcome, we expect market behavior to remain relatively stable. On the other hand, when political outcomes are less predictable, market actors will shift their portfolios out of assets whose value is vulnerable to alternative government policies toward assets offering returns that are better insulated. Therefore, we expect returns to be relatively lower in these vulnerable markets during periods of pronounced political uncertainty.
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