Is Heightened Political Uncertainty Priced in Stock Returns? Evidence from the 2014 Scottish Independence Referendum

Julia Darby, Jun Gao, Siobhán Lucey, Sheng Zhu

Research output: Working paperDiscussion paper

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Abstract

We contribute to a growing literature on economic and financial impacts of political uncertainty by assessing whether heightened uncertainty associated with an important political event is priced into stock returns. Our particular study looks at the period surrounding the 2014 Scottish Independence Referendum, although we argue that our approach and findings have wider relevance to assessing impacts of other political events, including Brexit. Using company data and portfolio-level analysis we document significant variation in returns and demonstrate that uncertainty betas help predict the cross-sectional dispersion of returns. These findings are robust to inclusion of controls (standard risk factors), but no longer hold when a Scottish specific uncertainty measure is replaced with UK-wide measures of either economic policy uncertainty or stock market uncertainty, adding support to the hypothesis that our findings are driven by referendum related uncertainty. We conclude that heightened political uncertainty was priced during the period surrounding the referendum, i.e. that uncertainty averse investors succeeded in gaining compensation for holding the volatile stocks of Scottish headquartered companies
Original languageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-30
Number of pages31
Volume19
Publication statusPublished - 14 Aug 2019

Keywords

  • political uncertainty
  • stock market volatility
  • pricing volatility
  • stock returns
  • 2014 Scottish independence referendum

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