Suffrage Expansions and Financial Market Reactions

• In Event: The Politics of Financial Markets

Abstract

Sovereign bond yields have recently been used to assess whether regimes face “revolutionary threats” as envisioned by key theories of democratization (Boix 2003; Acemoglu and Robinson 2006; Przeworski 2009). However, if a regime faces a significant risk of violent overthrow, then every regime-dependent security should impound this risk— not just bonds, but also currency, as well as stock shares. We develop this point, proposing a general method of assessing revolutionary threats by evaluating the value of hedging and diversifying a portfolio of regime-dependent securities. Such a intra-regime risk mitigation strategy should be significantly less effective when revolutionary threats spike. We then apply our method to the case of England’s Great Reform Act, finding no support for the hypothesis that investors thought England’s unreformed regime faced a significant risk of overthrow.

Authors

• Gary W. Cox, Stanford University

• Sebastian M. Saiegh, University of California, San Diego