The financial costs of political uncertainty: Evidence from the 2016 US presidential elections
| Date | 01 May 2020 |
| Published date | 01 May 2020 |
| Author | Refk Selmi,Jamal Bouoiyour |
| DOI | http://doi.org/10.1111/sjpe.12231 |
166
|
wileyonlinelibrary.com/journal/sjpe Scott J Polit Econ. 2020;67:166–185.
© 2019 Scottish Econ omic Society
1 | INTRODUCTION
The politica l uncertaint y has long been perceived as an indi spensable det erminant of invest ment decisions a nd
asset price dyna mics. The financial ma rkets tend to react to new info rmation with respect to p olitical events that
may exert a signif icant influence on the cou ntry's macroecono mic, fiscal, and mone tary policies. In f act, the polit‐
ical events are f ollowed by investors who form or re vise their expectatio ns based on the results of the se events.
Informational e fficiency hy pothesis assum es that markets a bsorb news and p olitical tren ds into asset price s in
anticipation of el ection results. Much of the u ncertainty surroundi ng the outcome may be resolved prio r to the
election date . Such policy change s are typically as sociated with a decrea se in stock prices, pa rticularly if th e uncer‐
tainty is grea ter (Bouoiyour & Selmi, 2018a; Pa stor & Veronesi, 2012). Once the pol itical uncertaint y is mitigated,
stock prices wou ld rise again (Pantzalis , Stangeland, & Turtle, 20 00). Brown, Harlow, and Ti nic (1988) argued that
Accepted: 14 June 2019
DOI: 10 .1111/sjpe.1 2231
ORIGINAL ARTICLE
The financial costs of political uncertainty:
Evidence from the 2016 US presidential elections
Refk Selmi1,2 | Jamal Bouoiyour1,2
1IRMAPE, ESC P au Business Scho ol, Pau,
France
2CATT, Universit y of Pau, Pau, France
Correspondence
Refk Selmi, IR MAPE, ESC Pau Busi ness
School, Pau, France.
Email: s.refk@yahoo.fr
Abstract
The victory of Mr. Donal d Trump came as a surprise to a
wide range of market par ticipants. Some of the element s of
his economic plan were env isaged to affect all U S sectors.
This paper assesse s the reactions of disaggregat ed US stock
market to the 2016 US presidential e lection result s, and
possible deregulat ion that is to follow after his inaugurat ion.
We find that the differ ent US sectors were significantly a nd
varyingly infl uenced by the election result , and were greatly
reactive during t he days after the inauguration. This und er‐
scores that uncer tainty tends to persist and even ris es since
the President‐elect took of fice.
KEYWORDS
2016 US presidential e lections, electi on day, Inauguration Day, US
stock market, sectoral‐level analysis
JEL CLASSIFI CATION
E60; E65; G10; G13; G14
|
167
SELMI and BOUOI YOUR
as uncertai nty is reduced, price chang es tend to be positive on average. O n the contrary, if the elect ion outcome
does not permit m arket partic ipants to immed iately and effe ctively evalu ate the effect o n the nation's futu re,
then the elec tion result constitu tes an uncertaint y inducing surprise. I n this case, positive pr ice changes should be
anticipated af ter the election, t hat is, until uncerta inty about the polic ies to be achieved by the winn er is resolved.
A significant nu mber of past studies deal w ith the impacts of politi cal uncertainty on f inancial market perfor‐
mances (see, inte r alia, He, Lin, Wu, & Dufrene , 2009; Jones & Banning , 2009; Li & Born, 20 06; Nippani & Medlin,
2002; Pantz alis et al., 2000 ; Sy & Al Zaman, 2011, etc.). Most of th ese researches prov ide deep evidence revea ling
that politica l uncertain ty significa ntly influence s risk and return i n financial mar kets. Pantz alis et al. (200 0), for
instance, ex amined the reac tions of stock ma rket indices acros s different cou ntries to politi cal electio n. They
claimed that pol itical uncer tainty fal ls over the two week s prior to elect ions, yieldin g to a rise in stock mar ket
valuations, in co nsistence with the uncer tain information hypot hesis of Brown et al. (1988).
While politic al uncertainty take s various shapes and forms i ncluding changes in the govern ment and changes
in the domesti c and foreign policies (Dahl & Sti nebrickner, 1963), this study focuse s on the 2016 US presidential
elections. T he political uncertai nty evidently exacerbates si nce the candidates running fo r office, if elected, will
undertake v arious policies, and elec tion outcomes are uncerta in. It corresponds to the uncer tainty with respect
to the government po licies (macroec onomic, monet ary, and fisca l policies) and the ir effect s on the economic
development an d financial markets (Pasqua riello, 2014). In brief, the political un certainty encompasse s both un‐
certaint y about the elec tion result an d uncertaint y regarding t he policies that m ay result from that o utcome
(Pasquariello & Zafeiridou, 2014).
A wide strand of li terature has con centrated their a ttention on th e impacts of po litical uncer tainty over US
presidential e lections on the US equit y market (e.g., Goodell & Bo dey, 2012; Goodell & Vahamaa, 2013; He et al.,
2009; Jones & B anning, 2009; Li & Born, 20 06; Nippani & Arize, 2005; Nip pani & Medlin, 2002, among ot hers).
Nippani and Ar ize (2005), Li and Bo rn (2006) and He e t al. (2009) provid ed deep evidenc e that the heighten ed
uncertaint y surrounding the US pre sidential elections i s sharply reflected in t he behavior of stock prices . Nippani
and Arize (2005 ) and He et al. (200 9) explored th e impact of the 2000 presid ential election outcome on equ ity
markets' per formances, and found th at equities are adverse ly affected by the rising u ncertainty over this eve nt.
Recently, some empir ical works assessing t he effects of the 2016 US pr esidential electio n results on the stock
market perfo rmances have been conduct ed by Hachenberg, Kies el, Kolaric, and Schierec k (2017), Bouoiyour and
Selmi (2018b), and Pham , Ramiah, Moosa, H uynh, and Pham (2018). The p resent analysis comp lements the stud ies
of Hachenberg e t al. (2017) and Pham et al . (2018) as they follow diss imilar paths by mea ns of the event study
methodolog y. The major distin ction is that alt hough Hachen berg et al. (2017) and Ph am et al. (2018) examin ed
one event only (i.e. , the result of the 2016 US p residential ele ction), we compare the response s of different in‐
dustries to th e outcome of the elec tions and to the I nauguration Day. The i ncreased unce rtainty se ems more
pronounced af ter the Inaugur ation Day. In fact, t he signed execut ive orders shor tly after th e inauguration of
Mr. Trump are generating a clim ate of heightened uncerta inty. Indeed, several indu stries (e.g., those in the h ealth
care) faced risin g uncertain ty over the imple mentation of new r ules. In other wo rds, they are highl y concerned
about how the new r ules are quite rea dy to be put into act ion, and which o ld rules may be abo lished to meet
President‐elect D onald Trump's executive orders . In brief, several issues cont inue to be unclear, which give rise t o
further uncertainty.
Instead of provid ing accurate evidence on sto ck prices and the associated c hanges in stock market capi taliza‐
tion, we believe th at equity price r esponses will a lso be useful to ef fectively as sess the future f inancial effects
of elections. S hare prices have lo ng been viewed as p otential aggreg ates of all informati on available to mar ket
participan ts at any given point in time. They p roperly reflect expe ctations about the fut ure profitability of dis ag‐
gregated share s. Expected fut ure changes in the macr oeconomic, monet ary, and fiscal poli cies in post‐presidentia l
elections wi ll therefore pro mpt significan t share price resp onses. Evidentl y, market particip ants may be wrong ,
and share price move ments might not appropriate ly detect the impacts of su ch changes. But given the informa ‐
tion aggregat ion function of equity mar kets, stock price reactio ns detect the “consensus view” of wel l‐informed
To continue reading
Request your trial