Market Reaction to Political Risk: Evidence From the 2018 Brazilian Presidential Election

Pereira, Gustavo Medeiros; Colombo, Jéfferson Augusto; Figueiredo, Otávio

doi:10.1080/10978526.2021.1942025

Cited by 1 publication

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“…More precisely, such a political change, especially when is not widely anticipated, determines investors in stock markets to refine and adjust their expectations regarding future macroeconomic policy. Therefore, in recent decades, a growing body of literature has investigated the extent to which presidential election outcomes shape the dynamics of the stock market (see, e.g., Białkowski et al, 2008; Leblang & Mukherjee, 2005; Maqsood et al, 2020; Pantzalis et al, 2000; Pereira et al, 2021). Furthermore, considering that the U.S. presidential election is a signal at a global scale, the analysis of the effects of such a weighty political event on the stock market is a matter of debate in empirical research (Abolghasemi & Dimitrov, 2021; Kim & Kim, 2021; Leblang & Mukherjee, 2004; Mnasri & Essaddam, 2021).…”

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confidence: 99%

The Global Stock Market Reactions to the 2016 U.S. Presidential Election

2023

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Donald Trump’s victory in the 2016 presidential election was a political surprise to almost everyone, domestically and internationally. This paper investigates international investors’ reaction to this apparent global political surprise. Employing an event study methodology, we test the three widely known behavioral hypotheses concerning international investor reaction to this unexpected news, that is, the Overreaction Hypothesis (OH), the Uncertain Information Hypothesis (UIH), and the Efficient Market Hypothesis (EMH). The study results show that most of the indexes initially reacted unfavorably to the announcement of Trump’s win; however, subsequent stock index returns exhibit corrective upward patterns consistent with the predictions of the OH, except for the Latin American and France markets. The reactions of the other indexes appear to be favorable and in line with the prediction of the UIH. These findings suggest that in most countries under study, investors could utilize contrarian strategies to generate abnormal returns, as evidenced by price reversal following the arrival of the surprise. JEL classification: G14, G15.

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