The Price of Political Uncertainty: Theory and Evidence from the Option Market (No. w19812). National Bureau of Economic Research

We empirically analyze the pricing of political uncertainty, guided by a the-oretical model of government policy choice. To isolate political uncertainty, we exploit its variation around major political events, namely, national elections and global summits. We find that political uncertainty is priced in the equity option market in ways predicted by the theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the risk associated with political events, including not only price risk but also vari-ance and tail risks. This protection is more valuable in a weaker economy as well as amid higher political uncertainty