Political uncertainty and stock market volatility: new evidence from the 2014 Scottish Independence Referendum

Abstract

We investigate the impact of heightened political uncertainty in the run-up to, and after, the 2014 Scottish independence referendum. The conditional volatilities of stock returns of our Scottish index and the FTSE all share index are characterised by the same GARCH parameters for a sample ending in late 2013, but this no longer holds when estimation extends closer to the referendum. The relative volatility of Scottish companies' stock returns peaked when polls indicated the referendum result was 'too close to call,' fell back on the result, but rose again in the run-up to publication of proposals for further devolution.

Political markets as equity price factors

“…For the 2014 Scottish independence referendum, J γ,2 is significant at the 95% level for K=0 and at the 99.9% level for K=1 and 5. This is consistent with the conclusions of Darby et al (2019) and Acker and Duck (2015) that showed that the CAPM residuals are related to betting odds. However, we go further and demonstrate that there is still explanatory power in the betting markets when the additional Fama-French factors are controlled for.…”

“…In this paper we seek to describe the relationship between these two types of markets in the weeks and months leading up to a political event. There are a small number of examples in the literature that study this question (see Manasse et al (2020), Hanna et al (2021, Acker and Duck (2015) and Darby et al (2019)). However, they consider only a single event and typically study only empirical relationships.…”

Betting and financial markets are cointegrated on election night

“…Acker and Duck (2015) find that the residuals of an estimated CAPM model are significantly positively related to several proxies for the likelihood of a vote to remain as part of the UK, one of which is a weighted sum of the Betfair exchange odds for 'No'. Similarly Darby et al (2019) study equities listed on the LSE that were headquartered in Scotland. They find that uncertainty betas help predict cross-sectional returns.…”

How do markets react to political elections during periods of insecurity and governance crises? Evidence from an African emerging democracy

“…More recent studies have looked at political uncertainty associated with the 2016 Brexit referendum (e.g. Hill et al, 2019) and the 2014 Scottish independence referendum (e.g., Darby and Roy, 2019) and reported evidence of a significant stock market impact.…”