The Political Sources of Systematic Investment Risk: Lessons from a Consensus Democracy
Journal
The Journal of Politics
ISSN
0022-3816
ISSN-Digital
1468-2508
Type
journal article
Date Issued
2009-04-01
Author(s)
Abstract
This study examines the relationships between democratic politics and systematic investment (or capital) risk. Low risk is crucial to any well-functioning economy, as it encourages capital investment, facilitates growth, and enhances overall economic performance. Up until now, scholars have not analyzed how politics affects uncertainty about investment conditions on financial markets. This study distinguishes pre-electoral, post-electoral, and institutional factors and examines how these influence systematic investment risk using daily stock market data from Germany. The results suggest that more (less) favorable and reliable investment conditions during the incumbency of right(left)-leaning governments lead to lower (higher) investment risk. This partisan effect is stronger, the more inflation increases and depends on whether government is unified or divided. Investors also anticipate the effect of government partisanship: Systematic risk decreases (increases) if the electoral prospects of a right(left)-leaning government enhance. Finally, grand coalition governments as well as periods of coalition formation trigger higher investment risk.
Language
English
Keywords
Democracy
parties
elections
divided government
economy
political economy
stock market
finance
risk
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Cambridge Univ. Press
Publisher place
New York, NY [u.a.]
Volume
71
Number
2
Start page
661
End page
677
Pages
17
Subject(s)
Division(s)
Eprints ID
222415
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Name
Bechtel 2009_Politics and Risk.pdf
Size
208.82 KB
Format
Adobe PDF
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