This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

« Back to Results

Political Uncertainty and Asset Prices

Paper Session

Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Seaport A
Hosted By: American Finance Association
  • Chair: Stefano Giglio, Yale University

Inequality Aversion, Populism, and the Backlash Against Globalization

Lubos Pastor
,
University of Chicago
Pietro Veronesi
,
University of Chicago

Abstract

Motivated by the recent rise of populism in western democracies, we develop a model in which a populist backlash emerges endogenously in a growing economy. In the model, voters dislike inequality, especially the high consumption of ``elites." Economic growth exacerbates inequality due to heterogeneity in risk aversion. In response to rising inequality, rich-country voters optimally elect a populist promising to end globalization. Countries with more inequality, higher financial development, and current account deficits are more vulnerable to populism, both in the model and in the data. Evidence on who voted for Brexit and Trump in 2016 also supports the model.

Tax Policy Uncertainty and Asset Prices: Evidence from Dual-class Corporate Bonds in Early 20th Century

Matthias Fleckenstein
,
University of Delaware
Priyank Gandhi
,
Rutgers University
Pengjie Gao
,
University of Notre Dame

Abstract

In the 1900s, U.S. firms issued both taxable and tax-exempt bonds. Investors paid all taxes on income from taxable bonds, but the firm covered taxes on investors' behalf on income from tax-exempt bonds. Using this unique data set for "dual-class" bonds, we derive a novel market-based measure of tax policy uncertainty, and examine its properties during the turbulent period immediately after the introduction of the first federal income taxes. Tax policy uncertainty varies considerably over time, is priced in the cross-section of asset returns, and commands a statistically and economically significant risk premium. We provide novel evidence on the risk premium investors demand for the uncertainty regarding taxes they face on their investment.

Political Uncertainty and Commodity Markets

Kewei Hou
,
Ohio State University
Ke Tang
,
Tsinghua University
Bohui Zhang
,
Chinese University of Hong Kong

Abstract

We examine the effects of political uncertainty on commodity markets from both theoretical and empirical points of view. Our theoretical model shows that political uncertainty on the demand (supply) side has a negative (positive) impact on commodity prices and a positive (negative) impact on convenience yields and risk premiums. To test our model, we construct a comprehensive sample of 87 commodities across 12 countries over the 1960-2017 period and elections from 17 commodity demand/supply and trading countries. Consistent with our model predictions, commodity prices decline by 6.4% and convenience yields increase by 1.8% in the quarter leading up to U.S. presidential elections as the proxy for political uncertainty on the demand side. An opposite result is obtained for political uncertainty on the supply side.
Discussant(s)
Hanno Lustig
,
Stanford University
Clemens Sialm
,
University of Texas-Austin and NBER
Jonathan Brogaard
,
University of Utah
JEL Classifications
  • G1 - General Financial Markets