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Better the devil you know: The Influence of Political Incumbency on Australian Financial Market Uncertainty

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Open access
Authors
Smales, Lee
Date
2015
Type
Journal Article

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Smales, L. 2015. Better the devil you know: The Influence of Political Incumbency on Australian Financial Market Uncertainty. Research in International Business and Finance. 33: pp. 59-74.
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Research in International Business and Finance
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School of Economics and Finance
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NOTICE: this is the author’s version of a work that was accepted for publication in the journal Research in International Business and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in the journal Research in International Business and Finance, Vol.33, (2015). DOI: 10.1016/j.ribaf.2014.06.002

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Abstract

The Australian federal election cycle, which occurs approximately every 3 years, causes much media attention and invokes indecision regarding investment decisions in both the real economy and financial markets. This paper constructs measures of political uncertainty and formally explores their relationship with market uncertainty, as measured by implied volatility. The empirical evidence suggests that increasing (decreasing) levels of uncertainty around the election result induce higher (lower) levels of market uncertainty. In a case of the market preferring the devil it knows, an increasing (decreasing) likelihood of the incumbent party, whose economic policies are well-known, winning the election, reduces market uncertainty. The results remain significant even after con-trolling for a number of macroeconomic variables, and when an alternative GARCH framework is considered.