Political risk and stock markets: Evidence from 2024 Indian National Elections

Following the seminal works of Pastor & Veronesi (2012, 2013, and 2020), we examine and quantify a novel source of political risk for the largest democracy India – “failure to form the government.” Leveraging the surprise exit poll and actual election results from the 2024 Indian national elections and stock market reactions to these results, we answer the following questions: (1) Why did stock markets behave in this peculiar manner? (2) Which industry sectors were the most and least sensitive to political risk? (3) How can domestic and global investors benefit from these results? Overall, this behavior of Indian stock markets can be traced back to the unique nature of the coalition form of parliamentary democracy in India, engendering a unique political risk of “failure to form the government.” We also demonstrate that a simple sector-rotation-based strategy can yield cumulative returns of 6%–12% within a 20-day window surrounding election results. Our results dispel the conventional notion that Indian stock markets favor one party or coalition over another.