Market Responses to Politics

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.