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

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  • BRYAN KELLY
  • ĽUBOŠ PÁSTOR
  • PIETRO VERONESI
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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Bryan Kelly & Ľuboš Pástor & Pietro Veronesi, 2016. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," Journal of Finance, American Finance Association, vol. 71(5), pages 2417-2480, October.
    • Handle: RePEc:bla:jfinan:v:71:y:2016:i:5:p:2417-2480
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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