The Real-Time Impact of Political Risk on Market Valuations: Evidence from Peru

• In Event: Methodological Developments for Social Media

Abstract

We leverage Pedro Castillo’s failed coup attempt in Peru on December 7th, 2022, to estimate the real-time impact of political risk on market valuations. Using high-frequency (minute-by-minute) price data of the country’s broad stock market index we identify two structural breaks in the series. We then interpret these break points exploiting the incidents’ precise timestamp based on media outlets’ Twitter feeds. The first one corresponds to a big sell off triggered by Castillo’s televised announcement that he was shutting down Congress. The timing of the second one coincides with the surge in share prices that took place when news about his successful impeachment first broke. These findings indicate that political developments in Peru were incorporated into stock prices very quickly. They also suggest that accounts of liquid assets’ responses to political risk should rely on high- rather than low-frequency data, as well as sudden rather than protracted political transformations.

Authors

• Juan Pablo Micozzi, Instituto Tecnologico Autonomo de Mexico

• Patricio D. Navia, Universidad Diego Portales

• Pablo Martin Pinto, University Houston

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