What do financial markets think of the 2016 election?

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Citation: Justin Wolfers, Eric Zitzewitz (2016) What do financial markets think of the 2016 election?.



Download: https://www.brookings.edu/wp-content/uploads/2016/10/what-do-financial-markets-think-of-the-2016-election_102016_wolferszitzewitz.pdf

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Summary:

Event study using sharp movements in both financial market prices and the probability of Clinton or Trump winning the 2016 US Presidential election during and immediately after the first Clinton/Trump debate. Compared to counterfactual distribution of financial market movements to test for statistical significance.

Trump lost the first debate according to prediction market prices. Financial markets expected higher and less volatile equity markets. Together these reflected a statistically significant "Trump discount."

The second debate confirmed the Trump discount, but was not as useful as an event study, as the most relevant news (a leaked tape) was covered over several days.

Historical study of market movements and election probability according to bettors back to 1880 show a Republican premium (muted post-WWII) in most elections for which there is a statistically significant premium or discount.

Theoretical and practical relevance:

Blog post: https://www.brookings.edu/research/what-do-financial-markets-think-of-the-2016-election/