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Political uncertainty and sovereign bond markets

Author

Listed:
  • Lukas Handler

    (WU (Vienna University of Economics and Business))

  • Rainer Jankowitsch

    (WU (Vienna University of Economics and Business))

Abstract

We analyze the effects of political uncertainty on prices and liquidity of sovereign bonds. Specifically, we investigate Italian government bonds during the European sovereign debt crisis and focus on political summits and elections. We find a significant drop in prices in combination with high illiquidity and sell-side pressure before the events. The event returns are significantly positive and followed by a positive price trend. The effects are stronger when uncertainty, as measured by the EPU index, is high and economic conditions are weak. In addition, political uncertainty also affects the primary market and we find significant costs associated with issuing sovereign bonds in highly uncertain times.

Suggested Citation

  • Lukas Handler & Rainer Jankowitsch, 2025. "Political uncertainty and sovereign bond markets," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 39(1), pages 47-97, March.
    • Handle: RePEc:kap:fmktpm:v:39:y:2025:i:1:d:10.1007_s11408-024-00461-6
    DOI: 10.1007/s11408-024-00461-6
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    More about this item

    Keywords

    Political uncertainty; Sovereign bonds; Risk premium; Liquidity;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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