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Stock Market; Election; GARCH; Iowa Electronic Market; Volatility; Efficient Market Hypothesis
Uncertainty about the economy can increase volatility in financial market returns. One potential source of uncertainty is the outcome of an upcoming national election. This paper uses a GARCH model to estimate the effect of uncertainty surrounding U.S. Presidential elections on the volatility of U.S. stock market returns from 1992-2012. Uncertainty in these elections is measured using asset prices from the Iowa Electronic Market (IEM), an on-line futures market based on real-world events, including U.S. elections. The empirical results show that the conditional variance in S&P 500 returns increases when IEM presidential election futures market asset prices indicate greater uncertainty about the outcome of an upcoming election.