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The Price of Political Uncertainty: Theory and Evidence from the Option Market

The Price of Political Uncertainty: Theory and Evidence from the Option Market 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

The Price of Political Uncertainty: Theory and Evidence from the Option Market

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References (2)

Publisher
Wiley
Copyright
© 2016 the American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/jofi.12406
Publisher site
See Article on Publisher Site

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.

Journal

The Journal of FinanceWiley

Published: Oct 1, 2016

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