Assessing and comparing the change in volatility of different countries due to national elections

Abstract

Volatility has proven to be synonymous with hallmark events of all categories, none more so than elections. Although regularly held, elections often prove to intermingle with the movements of security markets and have therefore been the question of many academics and financial planners alike. Volatility itself is estimated by the use of stock returns through the GARCH (1,1) framework, after the necessary checks were made. This study aims to, then use this estimated volatility to provide a breakdown of the dynamic nature of volatility within a period ranging from twelve months before to twelve months after for a set of five countries (France, Germany, Spain, the UK, the USA). Additionally, a second model provided more control variables that remained unaccounted for when the fixed effects approach was used. A further individual breakdown of countries also provided context and most importantly scrutinization of the literature's main general ideas. These ideas provided the main hypotheses of this study. Firstly, volatility is decreasing towards elections as the outcome of the elections becomes clearer, in essence serving as a reduction in the normal uncertainty that often accompanies security markets. In addition, the second hypothesis relates elections themselves as inciting volatility to increase and return to pre-election levels. In other words, ultimately election outcomes almost always result in some surprise to the market. Results ultimately proved the hypotheses to be true for the panel case, and for some of the countries individually. The rejection of the hypotheses for 2 countries provides a check for the adequacy of utilising the panel approach to explain dynamic nature of volatility for more specific cases. This study ultimately proves useful for any financial planner and investor among others. It provides a tangible way of assessing the behaviour of investors and therefore of the market near elections and therefore a useful tool for economic decisions to be made.