Empirical Analysis of the Link between Politics and Stock Market Behaviour

Political risk factors have become an important source of systematic and non-systematic risk in capital markets. From a micro perspective, policy risk and political connections are widespread in different countries. Therefore, how to effectively manage the political risks has become an increasing concern for researchers and investors. Politics is a broad and complex subject, and financial scholars have studied it from many perspectives. This thesis consists of three empirical studies that focus on three specific political aspects and investigate how these aspects affect stock market performance. The first empirical chapter examines how economic policy uncertainty (EPU) is related to stock market performance in the U.S. I find that an increase in the EPU index negatively affects S&P500 returns and increases its implied volatility. Furthermore, the component of the EPU index that has the strongest explanatory power is that based on newspaper coverage of policy uncertainty, while the other three lack statistical significance. Governments should try to maintain policy stability and sustainability, so that investors can make reasonable predictions about policy changes and arrange their investment planning accordingly. Moreover, investors should also pay attention to expectations of policy change and adjust their portfolios based on policy uncertainty exposure. The second empirical chapter examines the impacts of democracy improvement on stock markets from an international perspective. The empirical results suggest that increases in political rights lead to higher stock returns. Investors might seek investment opportunities in democratic countries’ markets. For policy makers, improving economic institutions is not the only way to attract foreign investment and promote capital market development, reforming the political regime is also worth thinking about. The third empirical chapter conducts a textual analysis on U.S. presidential speeches to examine the influence of political communications on stock market. Presidential speeches reflect the president’s and advisers’ views on the country's future economy, and may also contain new information related to future policy directions. This study employs content analysis techniques and an event study method to analyse the market response to the linguistic characteristics of the presidents’ addresses. The results show a significant and positive association between the level of commonality expressed in a president’s speech and abnormal returns on the DJIA around the speech date. This implies that peaceful speeches are associated with a statistically significant increase in abnormal returns. These findings suggest that as well as analysing the specific content of public political information, its linguistic features and emotional tendencies are also worthy of investors’ attention

The sample mean excess of the highly pathogenic influenza incidence data against threshold values.

<p>The figure shows the empirical mean excess function has a positive slope above the threshold 9, which indicates the data follows the GPD with a positive shape parameter.</p

Monthly incidence of highly pathogenic influenza cases in Zhejiang province from April 2009 to November 2013.

<p>The vertical axis represents the monthly incidence of highly pathogenic influenza cases based on the provincial surveillance data. X-axis shows the corresponding time of each monthly surveillance data of highly pathogenic influenza.</p

A QQ plot of residuals from GPD fit to the highly pathogenic influenza incidence data over threshold 9.

<p>The solid line corresponds to standard exponential quantiles. The approximate linear QQ plot indicates the residuals from GPD follow the standard exponential distribution.</p

Point estimate at the tail.

<p>Panels a, b, c and d show the point estimation of monthly incidence of highly pathogenic influenza in Zhejiang province at different quantiles (0.917, 0.958, 0.972 and 0.983). Estimated tail is plotted as solid line, actual data in circles. Vertical dotted lines are estimated monthly incidence of highly pathogenic influenza in Zhejiang province at different quantiles (0.917, 0.958, 0.972 and 0.983) (middle dotted line), lower confidence level (left dotted line) and upper confidence level (right dotted line).</p

A QQ plot of the highly pathogenic influenza incidence data against standard exponential quantiles.

<p>Notice that a concave departure from the straight line in the QQ plot (as in this plot) is an indication of a heavy-tailed distributions.</p

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Additional file 1

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Originally published in JOSA B on 01 February 2014 (josab-31-2-201

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Multilingual abstracts in the six official working languages of the United Nations. (PDF 304 kb