Wolfers for Brookings: “What do financial markets think of the 2016 election?”
The Brookings Institution published a paper by Justin Wolfers and Eric Zitzewitz on October 20: “What do financial markets think of the 2016 election?”
On September 26, 2016, Hillary Clinton was regarded by post-debate polls to have defeated Donald Trump in the first Presidential debate, and her odds of election in the Betfair prediction market increased from 63 to 69 percent. Given that most financial markets are typically quiet during that time, movements in asset prices likely reflect market participants’ collective view of the impact of the 2016 election. During the debate event window, U.S., UK and Asian stock markets rose, crude oil rose, the currencies of trading partners such as Mexico, South Korea, and Canada rose against the dollar, and expected future U.S. stock market volatility dropped sharply. Given the magnitude of the price movements, we estimate that market participants believe that a Trump victory would reduce the value of the S&P 500, the UK, and Asian stock markets by 10-15%, would reduce the oil price by $4, would lead to a 25% decline in the Mexican Peso, and would significantly increase expected future stock market volatility. Market movements over the October 7-9 weekend, during which a tape was released that prompted many Republicans to unendorse Trump, tell a largely consistent story. Clinton's probability of election rose, stocks rose, volatility fell, and the currencies of Mexico and Canada rose against the dollar.