Division of the Humanities and Social Sciences California Institute of Technology Pasadena, California 91125 Can We Insure against Political Uncertainty? Eivdence from the U.s. Stock Market

Abstract

We show that existing stocks that are currently traded in the U.S. stock market can be used to hedge political uncertainty. Focusing on the 2000 U.S. Presidential election, we construct two " presidential portfolios " composed of selected stocks anticipated to fare differently under a Bush versus a Gore presidency. To construct these portfolios we use data on campaign contributions by publicly traded corporations and identify the major contributors on each side. Using daily observations for the six months before the election took place, we show that the excess returns of these portfolios with respect to overall market movements are significantly related to changes in electoral polls.

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