Does Democracy Pay? Exploring the Impact of Democracy Indicators on Global Relative Stock Market Performance

Abstract

This thesis explores the relationship between the level of adoption of various democratic norms and subsequent relative price returns of stock indexes in 74 different countries. This analysis replicates findings from recent research suggesting autocratic states are characterized by lower returns than democratic ones, despite exhibiting higher return volatility. I replicated and sufficiently verified the prior findings that democratic norms do indeed “matter” for future stock returns, across the same time horizon of 1975 to 2015 used in a prior study.

In addition, utilizing a more comprehensive dataset from the Varieties of Democracy (V-Dem) project, which features a longer dataset and a multi-dimensional definition of democracy, my thesis furthers the understanding of the impact of democracy on stock returns by exploring an extension to the existing literature. My research extension suggests that of the five distinct aspects of democracy, as defined by V-Dem— electoral, liberal, participatory, deliberative, egalitarian—the liberal and deliberative aspects have the strongest and most statistically significant impact on stock returns.