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Political Events and Financial Markets

Essay by   •  January 22, 2019  •  Essay  •  4,355 Words (18 Pages)  •  54 Views

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We can count numerous political turbulent events in recent times such as Trump’s election, the Brexit, terrorist attacks, countries going bankrupt or even presidential elections taking a completely new turn. All these recent political events have groundbreaking impacts on all kinds of aspects of our society. What we study in this thesis is thus how do such political and mediatized events will impact the financial markets. Indeed, we know financial markets are impacted by a very large number of internal factors such as interest rates, the wellbeing of companies, the economy etc. But what about the external factors. These factors are unpredictable and are not directly related to financial indexes and this is what we study in this thesis.

Disposing of this era which is full of political events of very different aspects, this is the perfect decade to study the impact of these events on our financial markets. More over politics being very unpredictable in this period, the study of its impact is only the more interesting nowadays.

Financial markets are very resistant but will more or less react to events. Indeed, the United Kingdom leaving the European Union obviously had an impact on financial stock markets. The markets quickly go back to their normal rhythm but still take a hit. It is thus interesting to study to which extent the markets get hit according to the event and its relevance. Elections are also a good example of the markets moving up and down. Depending on the candidate and his motivation and ideas, the markets will fluctuate in accordance. “A change in government often means a change in ideology for the country's citizens, which usually means a different approach to monetary or fiscal policy, both of which, especially the former, are big drivers of a currency's value.” (Nick Lioudis, Deputy Editor of Financial Investment News)

Thus, the challenging aspects here consist in grasping which political events will influence our markets and if the financial markets are actually correlated with the numerous recent political events we have recently faced. In other words, in what measure can a political event influence financial markets in the European Union or the USA? In a world of large mediatization, it is relevant to embrace and to understand the actual extent and impact of these incidents on our society and more particularly on our markets.

In this study we restrict our scope to the stock market of the United States as well as the one of the European Union. However, our study in the European Union will only focus on countries with the biggest economies relative to their GDP, such as France, the United Kingdom, Germany etc (Statistics Times, 2018).

We decided to only focus on those two areas as it appears that they are the most powerful economies of the world, and that they have always been submitted to big changes in their economy, affecting also the worldwide economy.

Moreover, stock markets are one of the variables we decided to study as it best describes how an economy is doing, and is the most likely factor to variate and move in accordance with what happens in the country.
Finally, political uncertainty and political events is the second variable we chose, focusing on the last two decades. It appears that performance of an economy can largely be dependent on the political situation of a country.

We decide to restrict our research only on those powerful economies and more precisely on some big countries as mentioned previously, since data from countries like Romania for instance can be not only hard to find but also less relevant as the country’s economy is not as developed as in other countries. Economical and governmental policies

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will thus not affect the market in the same manner as in developed economies. In the end, we want to reveal and highlight a general pattern, which is why we cannot focus on every country of the European Union.

Furthermore, not only is a will to draw a general pattern by not taking into account countries that could alter our global results but it is also a problem of too much materials to cover and as we want to set up a general and kind of easy pattern to understand, we decided to put some limits regarding the countries that will be covered.

Whilst a lot of factors could impact stock markets, such as interest rates, inflation rate or news about the well-being of a company, this survey will only analyze the impact of political factors on stock markets since it will be too complex to analyze and understand how stock markets react to a lot of exogenous factors. As a result, we decided to put some limits regarding the explicative variables on stock markets’ reaction.

The objective of this thesis is to find the real power of different political events on the stock prices. We want to verify whether the market is truly affected by elections, economic decisions, or scandals. A stock index should only be affected by the result of different companies. Let us take an example, if Total makes huge losses, it should be normal that the value of the index decreases as it is one of the biggest companies in the index. However, sometimes, the correlation is not that clear. When Trump was elected, all the stock indexes in the Asian market decreased, even a stable market as the Nikkei 225 decreased by 5,36% (Japan Times, 2016). Our aim is to analyze the different impacts of political events and classify them to find which are the most relevant. We will also try to find out whether the events have a long-term impact or if the market readjusts itself a few days after. The objective is to know if the events are significantly important enough to take into account or if they are only a passing problem. Nowadays, financial centers are becoming increasingly connected, for instance if the FTSE 250 faces a big fall, it is very likely that all the European stock exchange will go in the same direction. The impact would be significant in the United States and in China as well. So, if we follow this reasoning, a major political event in a developed country could essentially create a world financial crisis. This explains why we think this subject is pertinent and is what we will try to discuss later on.

The study of the reaction of financial markets to political uncertainty is not a new question and has already been largely studied and examined. Indeed, a lot of researches have already been made on how national elections will impact the stock market of firms of that same country, especially in the United States regarding Trump’s election for example. In addition, studies also suggest that the political party to which belongs the winning candidate will also have a huge influence on the performance of stocks. However, all of these have studied the US phenomenon and did not extend the study to other countries.

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