How Do Sovereign Bond Investors Judge the Economic Performance of the Government?

69 Pages Posted: 23 Dec 2016

See all articles by Stefan Eichler

Stefan Eichler

Leibniz Universität Hannover; Halle Institute for Economic Research

Timo Plaga

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: December 22, 2016

Abstract

This paper investigates how sovereign bond investors assess the performance of the government by investigating cumulative abnormal sovereign bond returns surrounding national elections. For a sample of 101 election events in 45 emerging markets, we find robust evidence for a positive market reaction if a poorly performing government is voted out of office. The primary fiscal balance appears to be the most important indicator of government performance to sovereign bond investors. In addition, the results are most pronounced if the new head of government has a strong mandate and is supported by a sound system of institutions and governance.

Keywords: Political risk, Sovereign bond returns, Elections, Government performance, Event study

JEL Classification: G12, G14, G15, H11, H62, H63

Suggested Citation

Eichler, Stefan and Plaga, Timo, How Do Sovereign Bond Investors Judge the Economic Performance of the Government? (December 22, 2016). Available at SSRN: https://ssrn.com/abstract=2888874 or http://dx.doi.org/10.2139/ssrn.2888874

Stefan Eichler

Leibniz Universität Hannover

Institute of Money and International Finance
Koenigsworther Platz 1
Hannover, 30167
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Timo Plaga (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

HOME PAGE: http://https://tu-dresden.de/bu/wirtschaft/ime/die-professur/beschaeftigte/timo-plaga

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