NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Bryan Kelly, Lubos Pastor, Pietro Veronesi

NBER Working Paper No. 19812
Issued in January 2014
NBER Program(s):   AP   CF   EFG   POL

We empirically analyze the pricing of political uncertainty, guided by a theoretical model of government policy choice. To isolate political uncertainty, we exploit its variation around national elections and global summits. We find that political uncertainty is priced in the equity option market as predicted by theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the price, variance, and tail risks associated with political events. This protection is more valuable in a weaker economy and amid higher political uncertainty. The effects of political uncertainty spill over across countries.

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This paper was revised on July 15, 2015

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Document Object Identifier (DOI): 10.3386/w19812

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