Sentiment, Electoral Uncertainty and Stock Returns

Carlos Carvalho, Eduardo Zilberman and Ruy Ribeiro
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Ruy Ribeiro: Department of Economics, PUC-Rio

No 655, Textos para discussão from Department of Economics PUC-Rio (Brazil)

Abstract: We study the effect a huge sentiment shock, not related to economic conditions or government actions, on both political and stock market outcomes. To do so, we explore an empirical strategy that allows us to extract daily political news content from stock market data. Brazil’s 7-1 humiliating defeat to Germany in the 2014 World Cup was perceived by financial market participants to lead to a substantial punishment against the incumbent candidate at the polls three months later. A long-short portfolio strategy aiming to profit from political developments against the incumbent had a 6.4 percent return after the 7-1 match, while the overall market was up by 1.7 percent. According to this metric, the 7-1 match was the third largest political development against the incumbent (and sixth overall) during the election period. Hence, the effect of a negative change in investor mood on stock prices may not be necessarily negative as found in the literature, whenever the change in mood also has an impact on the expected outcome of closely disputed general elections.Creation-Date: 2017-07

Pages: 47p
New Economics Papers: this item is included in nep-lam and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:rio:texdis:655

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