Election uncertainty, economic policy uncertainty and financial market uncertainty: A prediction market analysis

By John W. Goodell, Richard J. McGee, Frank McGroarty. Journal of Banking & Finance, 2020

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We examine the relationship between election uncertainty, economic policy uncertainty, and financial market uncertainty in a prediction-market analysis, covering seven US presidential election campaigns. We argue theoretically that changes in the incumbent party re-election probability should be a key driver of changes in policy uncertainty. Consistent with this theory, we find that a large portion of changes in financial uncertainty in the final stages of election campaign seasons is explained by changes in the probability of the incumbent party getting re-elected. Our findings suggest that the incumbent-party election probability, derived from prediction markets, is an important measure of economic policy uncertainty in the days leading up to US elections.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/0f1d0c97859f5b4ee149fb3513f69ef6acecab03