XXVI Edition

14-15-16 December 2017"

The Economic Performance of the Government and the Resolution of Uncertainty in Sovereign Bond Markets around National Elections

Eichler Stefan, TU Dresden
Plaga Timo, Technische Universität Dresden

This paper investigates how sovereign bond investors assess the performance of the government by investigating cumulative abnormal sovereign bond returns surrounding national elections. For a sample of 101 election events in 45 emerging markets, we find robust evidence for a positive market reaction if a poorly performing government is voted out of office. The primary fiscal balance appears to be the most important indicator of government performance to sovereign bond investors. In addition, the results are most pronounced if the new head of government has a strong mandate and is supported by a sound system of institutions and governance.

Area: Asset Pricing and Derivatives

Keywords: Political risk; Sovereign bond returns; Elections; Government performance; Uncertain information; Event study

Paper file

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