This article argues that stock market responses to political events provide information on how politics affect markets. Political events, such as the election of a politician that is expected to enact “market-friendly” policies, lead to increases in stock market returns. Conversely, political events that are expected to have a negative impact on the economy and specific firms lead to decreases in stock market returns. The 2002 Brazilian presidential election provides a critical case study for evaluating this hypothesis. The authors use movements in the Brazilian stock market as proxies for future expectations for the Brazilian economy. Using a number of time-series regressions, they estimate the impact of the four main Brazilian presidential candidates on the mean and variance of the Brazilian stock market. These findings provide important insights into the expected impact of the main presidential candidates on the Brazilian economy and more generally, the relationship between elections and economic performance.
Associacão Nacional dos Executivos de Financas, Administracã e Contabilidade. (2002, August). ANEFAC, II(85), 8-9.
2.
Bernhard, William, & Leblang, David. (2002a). Democratic processes and political risk: Evidence from foreign exchange markets. American Journal ofPolitical Science, 46, 316-333.
3.
Bernhard, William, & Leblang, David. (2002b). Political parties and monetary commitments. International Organization, 56, 803-831.
4.
Boardman, Anthony, Vertinsky, Ilan, & Whistler, Diana. (1997). Using information diffusion models to estimate the impacts of regulatory events on publicly traded firms. Journal of Public Economics, 63, 283-300.
5.
Brazil: Business likes Lula—ButWall Street doesn't. (2002, October 14). BusinessWeek, p. 35-35.
6.
Brazilian bonds stage relief rally ahead of Sunday's poll. (2002, October 4). Euroweek, p. 18-18.
7.
Brazilian markets reel on leftist win. (2002, October 8). Los Angeles Times, p. C4-C4.
8.
Brealey, Richard A., & Myers, Stewart C. (1991). Principles of corporate finance. New York: McGraw-Hill.
9.
Coppedge, Michael. (1997). A classification of Latin American political parties(KelloggWorking Paper No. 244). Notre Dame, IN: University of Notre Dame, Helen Kellogg Institute for International Studies.
10.
D'Agostino, Ralph B., Belanger, Albert, & D'Agostino, Ralph B., Jr. (1990). A suggestion for using powerful and informative test of normality. The American Statistician, 44(4), 316-321.
11.
Dyckman, Thomas, Philbrick, Donna, & Stephan, Jens. (1984). A comparison of event study methodologies using daily stock returns: A simulation approach. Journal of Accounting Research, 22, 1-30.
12.
Freeman, John, Hayes, Jude, & Stix, Helmut. (2000). Democracy and markets: The case of exchange rates. American Journal of Political Science, 44, 449-468.
13.
Gilligan, Thomas W., & Krehbiel, Keith. (1988). Complex rules and congressional outcomes: An event study of energy tax legislation. Journal of Politics, 50, 625-654.
14.
Hagopian, Frances. (2001, December). Economic liberalization, political competition and political representation in Latin America. Paper presented at University of Chicago Comparative Politics Workshop, Chicago.
15.
Harvey, Campbell H. (1991). The world price of covariance risk. Journal ofFinance, 46, 111-157.
16.
Hays, John C., Stix, Helmut, & Freeman, John R. (2003). The electoral information hypothesis revisited. Unpublished manuscript, University of Michigan, Ann Arbor.
17.
Herron, Michael. (2000). Estimating the economic impact of political party competition in the 1992 British election. American Journal of Political Science, 44, 326-337.
18.
Herron, Michael, Lavin, James, Cram, Donald, & Silver, Jay. (1999). Measurement of political effects in the United States economy: A study of the 1992 presidential election. Economics and Politics, 11(1), 51-81.
19.
Leblang, David. (2002a). The political economy of speculative attacks in the developing world. International Studies Quarterly, 46, 69-91.
20.
Leblang, David. (2002b). Politics and markets: The stock market and the 2000 presidential election(Working Paper). Boulder: University of Colorado.
21.
Leblang, David, & Bernhard, William. (2000). Speculative attacks in industrial democracies: The role of politics. International Organization, 54, 291-324.
22.
Leblang, David, & Bernhard, William. (2003). Parliamentary politics and foreign exchange markets(Working Paper). Boulder: University of Colorado.
23.
Markets in Brazil plunge on worries over election. (2002, September 24). The New York Times, p. W1-W1.
24.
Martínez, Juan, & Santiso, Javier. (2003). Financial markets and politics: The confidence game in Latin American emerging economies. InternationalPolitical ScienceReview, 24(3), 363-395.
25.
McGillivray, Fiona. (2003). Redistributive politics and stock price dispersion. British Journal of Political Science, 33, 367-395.
26.
McGillivray, Fiona. (2004). Privileging industry: The comparative politics of trade and industrial policy. New York: Cambridge University Press.
27.
Pacting with the enemy: Politics in Brazil. (2002, July 13). The Economist, 364(8271), p. 49-49.
28.
Pantzalis, Christos, Stangeland, David A., & Turtle, Harry J. (2000). Political elections and the resolution of uncertainty. Journal of Banking and Finance, 24, 1575-1604.
29.
Prabhala, Nagpurnanand R. (1997). Conditional methods in event studies and an equilibrium justification for stand event-study procedures. The Review of Financial Studies, 10(1), 1-38.
30.
Przeworski, Adam, Alvarez, Michael E., Cheibub, Jose Antonio,& Limongi, Fernando. (2000). Democracy and development: Political institutions and well-being in the world, 1950-1990. Cambridge, UK: Cambridge University Press.
31.
Roberts, Brian. (1990). Political institutions, policy expectations and the 1980 election: A financial market perspective. American Journal of Political Science, 43, 289-310.
32.
Royston, Patrick. (1991). Comment on sg3.4 and an improved D'Agostino Test. Stata Technical Bulletin, 3, 23-24.
33.
Spreading risk. (2002, June 29). The Economist, 363(8279), 79-79.
34.
StataCorp. (2001). Stata reference manual: Release 7. College Station, TX: Author.
