Pricing in the Polls: How Expected Election Outcomes Drive Asset Price Reactions in Advanced and Emerging Market Economies

Abstract

How do prior expectations influence the reaction in equity markets to an election result? In this thesis, I explore this question utilizing a dataset of 92 elections from 1988-2020 and election polls that were released ahead of their final rounds. Through the use of event studies, I find that in elections that are expected to be close prior to the vote taking place left-wing victories generate -1.753 percentage points of abnormal returns in response to election outcomes, compared to a -1.073 percentage point drop when only elections with close outcomes are considered. Additionally, there is no significant market reaction to right-wing victories in the same indices, potentially signaling that market actors are placing too much weight on a market-friendly outcome in their priors. Lastly, this analysis shows that emerging market nations have reactions of higher magnitude to election outcomes compared to advanced economies.