U.S. presidential elections: An international financial market perspective

PROBLEM: Stock markets flourish on information. The U.S. presidential elections attract the attention of the media, pollsters, and political and financial analysts who filter the information between the public and politicians, disseminating information into financial markets. A change in the outcome of the U.S. presidential elections and composition of the U.S. government leads to policy changes that affect the U.S. economy and the stock market. Foreign markets adjust to predictions, polls, and election surprises, creating international election effects. This study compared the effect of U.S. presidential elections on five international stock markets.;METHOD: An ordinary least square regression was used to compute the effect of the election on U.S. market indices. A Pearson correlation determined if there was a significant relationship between the Standard & Poor 500 (S&P500) and foreign stock exchanges. A structural-change equation regression model verified significance of comovement difference between the S&P500 and foreign stock exchanges during the U.S. presidential election event windows and pre- and postevent windows. To verify changes in volatility in the S&P500, and whether the volatility is similarly reflected in foreign stock exchange, a standard deviation compared the S&P500 and foreign-stock indices. A Granger causality test determine whether the S&P500 Granger caused foreign-stock exchanges during the period of U.S. presidential elections.;RESULTS: The study showed that U.S. presidential elections impacted U.S. stockmarket indices of S&P500, the Dow Jones Industrial Average, and to a lesser extent, the NASDAQ Composite, especially in years that elections were hotly contested. The study also found changes in correlation between the S&P500 and foreign indices during the 30trading-days event windows in most election years, and that changes in volatility of the majority of the indices did not follow the same pattern of volatility as the pattern shown by the S&P500 during the 90-trading-days presidential-elections investigation period. And finally, significant causal effects were witnessed in most event windows between S&P500 and the Johannesburg Stock Exchange All Share Index, the Jakarta Stock Exchange composite index and to some extent the Bangkok Stock Exchange of Thailand index, whereas the Mexican and Chilean indices showed the least causality effect from the S&P500 during the election period.