Political Business Cycles, Partisan Politics and the Effects of Political Events on the Stock Market: Evidence from a Developing Economy

Abstract

This paper studies whether the evidence supports the political business cycle (PBC) theory, partisan theory (PT) and rational partisan theory (RPT) by using stock market data from Turkey, a rapidly growing developing economy. In addition, we examine the impact of political events on the returns and volatility of the stock market. Results indicate that the PBC hypothesis is rejected by the data. We find permanent partisan effects in the conditional variance but not in returns. The conditional volatility of the returns is higher during the periods in which a leftist party or a coalition government is in office. We also find that the stock market returns temporarily decreases (increases) at the beginning of a right-wing (left-wing) government, providing evidence in favor of RPT. Finally, analysis results show that political developments affect both the returns and the volatility of the stock market. The link between macroeconomic fundamentals and the stock market established by the existing literature implies that political developments have significant implications for the real economy.

Keywords: Political Business Cycles, Partisan Politics, Political Events, Turkish Parliamentary Elections, Istanbul Stock Exchange

JEL Classification: D72, G20