Abstract: "Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that the economy also influences elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during Election Day. Analyzing financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and
oil prices and a stronger dollar under a Bush presidency than under Kerry. We also found a similar pattern holds for the 2000 Bush-Gore contest. Prediction market based analyses of elections from 1880 to 2000 also suggest that electing a Republican President raises equity valuations by roughly 2.5 percent. Source: Eric Zitzewitz, Stanford University upcoming in the Quarterly Journal of Economics, May 2007
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