This paper investigates the effect of divided governments on asset prices. For identification, we use changes in the implied probability of a divided government while votes are being counted. Using high frequency data from the betting market and US overnight futures market, we estimate a 1.4% decrease in the S&P 500 futures in the election event of a divided government. Results are similar for the 2010 UK election. Further analysis shows that divided government affects expected stock returns through the mechanism of policy uncertainty.

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ERIM Top-Core Articles
Journal of Econometrics
Erasmus School of Economics

Sojli, E., & Tham, W. W. (2015). Divided governments and futures prices. Journal of Econometrics, 187(2), 622–633. doi:10.1016/j.jeconom.2015.02.043