Market Volatility around U.S. Presidential Election (1928-2016): The Role of Political Uncertainty

This paper investigates the changes in market volatility around the United States presidential elections and inaugurations between the period of 1928 and 2016 during selected event windows: (-10, -1) vs. (+1, +10), (-20, -1) vs. (+1, +20), … (-90, -1) vs. (+1, +90), respectively. To isolate the corresponding impact of different types of political uncertainty, market volatility is examined under three partitions: magnitude of surprise in voting results, incumbency, and change in ruling party. The result indicates that the market volatility is more willing to settle down after an election with new president or a change in ruling party, mainly due to the comparatively higher volatility induced by such political events during the pre-election window. The results have implications for both individual and institutional investors who are exposed towards volatility risk.