Manifestations of Political Uncertainty around US Presidential Elections : Cross-Sectional Evidence from the Option Market

This study examines the effects of political uncertainty around US presidential elections on firm risk, expected return, trading activity, and dispersion of investor beliefs. To this end, we utilize information embedded in short-term options and exploit cross-sectional differences in firms' political features, such as their sensitivity to economic policy uncertainty, their stock returns' exposure to the presidential party, their geographical political alignment with the presidential party, and their political connectedness through campaign contributions. In addition to significant aggregate effects across firms due to political uncertainty, we find that sensitive, exposed, and aligned firms exhibit a substantially higher degree of option-implied price and tail risk, command a higher premium, and feature an increased dispersion of investor beliefs around the presidential election day