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.

Divided government, Elections, Expected returns, Policy uncertainty, Prediction markets
Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior (jel D72), Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook (jel E6), Asset Pricing (jel G12), Contingent Pricing; Futures Pricing (jel G13), Information and Market Efficiency; Event Studies (jel G14)
dx.doi.org/10.1016/j.jeconom.2015.02.043, hdl.handle.net/1765/86145
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