The Price of Political Uncertainty: Theory and Evidence from the Option Market

Pietro Veronesi, Pástor, Luboš and Bryan Kelly
Authors registered in the RePEc Author Service: Lubos Pastor

No 9822, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We empirically analyze the pricing of political uncertainty, guided by a theoretical model of government policy choice. After deriving the model's predictions for option prices, we test those predictions in an international sample of national elections and global summits. We find that political uncertainty is priced in the option market in ways predicted by the theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the risk associated with political events, including not only price risk but also variance and tail risks. This protection is more valuable in a weaker economy as well as amid higher political uncertainty.

Keywords: Options; Political uncertainty (search for similar items in EconPapers)
JEL-codes: G12 G15 G18 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
https://cepr.org/publications/DP9822 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The Price of Political Uncertainty: Theory and Evidence from the Option Market (2016)
Working Paper: The Price of Political Uncertainty: Theory and Evidence from the Option Market (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:9822

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP9822

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().