Scuttle for shelter: flight-to-safety and political uncertainty during the Spanish Second Republic

Abstract

The Spanish Second Republic was a unique experiment of democratization in interwar Europe, which was characterized by extreme levels of political uncertainty. We find that investors responded to shifts in uncertainty by selling stocks in favor of government bonds—a behavior known as flight-to-safety. Additionally, we find that political uncertainty caused stock market stress and induced significant differences in the cross-section of expected stock returns, consistent with the exposures to political uncertainty. The fact that investors recurrently scuttled to shelter into government bonds suggests that they did not perceive a radical change in the political regime as an immediate and credible threat.

Economic Uncertainty and Divisive Politics: Evidence from the dos Españas

“… 9 Previous work by Ghirelli, Pérez, and Urtasun (2019) and Battilossi, Houpt, and Verdickt (2022) also constructs uncertainty indices for Spain. Ghirelli, Pérez, and Urtasun (2019) cover more recent decades, but our EPU measure is comparable to theirs.…”

“…Ghirelli, Pérez, and Urtasun (2019) cover more recent decades, but our EPU measure is comparable to theirs. We differ from Battilossi, Houpt, and Verdickt (2022) in that we consider a longer time horizon and exploit the fact that we use two newspapers to show the link from political divisions and economic policy uncertainty.…”