Abstract

To the extent that asset prices are responsive to unexpected political events, hedging against election risk should be valuable to investors. This study uses option prices to investigate market expectations of electorally-induced financial risk in the United States between 1986 and 2020. The evidence reveals that the sensitivity of asset prices to U.S. national election outcomes is quite large, statistically significant, and varied substantially over time. A comparison between the electoral risk estimates (based on option prices) and the actual post-electoral volatility of stock market returns, indicates that hedging against election risk has become increasingly expensive over time. Finally, an examination of the 2016 presidential election suggests that options markets may provide more reliable estimates of electoral uncertainty than election forecasts based on public opinion polls and/or prediction markets.