Does politics matter? : The influence of elections and government formation in the Netherlands on the Amsterdam Exchange Index

Abstract

In stable democratic countries the redistribution of power is institutionalized. Yet, there are periods of increased political uncertainty: During electoral campaigns there is uncertainty about who will win the election. And in multiparty parliamentary systems the uncertainty over who will actually govern usually continues throughout the coalition formation process. This article tries to contribute to answering the question whether and how financial markets react to such political uncertainty. Using a standard econometric tool, a GARCH (1,1) model, I find evidence for reactions of the AEX (Amsterdam Exchange Index) on periods of political uncertainty in the Netherlands. There is strong evidence that the political uncertainty during electoral campaigns is reflected in increased volatility of the AEX. The reactions during the coalition formation period seem to depend on the degree of uncertainty about the expected government coalition. The evidence for reactions on the ideological positions of government is mixed: Participation of left parties in governments seems to increase volatility, but the mean returns are not negatively affected in recent elections.