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Jump risk in the U.S. stock market: Evidence using political information

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  • Bento J. Lobo

Abstract

We examine the impact of U.S. elections and partisan politics on the stock market using jump–diffusion models of daily stock returns from 1965 to 1996. Our approach permits us to track jump risk in stock markets stemming from political incentives, and to separate the impact of routine trading and informational surprises, or jumps, on the mean and volatility of stock returns in election years and across partisan administrations. Our estimates reveal that the pattern of jumps and of routine trading varies with the political calendar. We find that midterm elections are a more important source of uncertainty compared to presidential elections. Jump risk increases by 10 and 20 percent for small and large‐cap stocks, respectively, in midterm election years. We also find that small stocks perform better under Democrats relative to Republicans. However, unexpected events are more frequent during Democratic administrations and these increase the jump risk, especially for large stocks, in these regimes.

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  • Bento J. Lobo, 1999. "Jump risk in the U.S. stock market: Evidence using political information," Review of Financial Economics, John Wiley & Sons, vol. 8(2), pages 149-163, September.
    • Handle: RePEc:wly:revfec:v:8:y:1999:i:2:p:149-163
    DOI: 10.1016/S1058-3300(00)00011-2
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