Why Politicians Really Might be to Blame for Volatile Markets
Countries like Canada with national elections have more volatile economies because businesses don’t like political uncertainty, according to a new study.
“Volatility is important because investors pay attention to volatility,” says Artem Durnev, an assistant professor of finance in the Tippie College of Business at the University of Iowa, and co-author of the study that looked at 50 countries, including Canada, between 1990 and 2006.
Durnev and his colleagues observed stock market volatility during the six months leading up to an election and for the year after the election. They found that in general, more mature democracies saw increased market volatility in the six months prior to an election. The markets in autocracies did not.
There were five federal elections in Canada during the time period, giving Canada’s stock market a higher volatility score than Argentina’s or China’s, and slightly higher volatility than the U.S., where national elections are held every four years.
The timing of Canadian federal elections is less easy to predict than in the U.S., especially since 2004, when then Liberal leader Paul Martin won the first minority government in Canada in 25 years. That was followed by Conservative minority governments in 2006 and 2008.
In general, flexible elections bring in additional uncertainty, says Durnev.
“You’re not only uncertain about who is going to win, but when it’s going to be called.”
Some industries are more affected than others by political uncertainty, including those that rely on a stable export market, labour-intensive industries that could face higher costs if a new government increases the minimum wage, and industries that rely on numerous contracts—such as the aerospace industry.
Industries that rely on strong export markets could also be affected if a new government makes changes to export subsidizations.
Autocratic regimes aren’t strong on democracy but they do provide economic stability, says Durnev.
“While a dictator is alive and doing well, it’s actually good to do trade because everything is certain,” says Durnev. “But then, during times of revolution, like in Egypt or Libya, everything is upside-down.”