The stock market reaction to the recent success of far-right parties in European, national elections

Abstract

The recent trend of victorious far-right populistic parties (FRPP) challenges established political landscapes and questions the globalised economy and sustainability efforts. This study examines the election effect of FRPP's recent success in Europe on stock market's returns and volatility as well as the perception of sustainability. It provides evidence on general election effects on stock markets and how these change with a successful participation of FRPP. In addition, I investigate, if the valuation of sustainability changes around the election of a FRPP government. For this purpose, I use a return and volatility event study of 66 elections in 16 European countries. The results are further regressed in a cross-sectional analysis on variables describing election characteristics, the recent rise of FRPP and the companies' environmental performance. The findings reveal that the volatility can double around elections but does not yield an appropriate return compensation for investors. When a FRPP enters successfully the election competition, this election effect is even accelerated. Lastly, I find that FRPP election wins change investor's perception of sustainability. They value environmental performance in the long run, as they expect, that the green transition is slowed, but not stopped by the short-term political change.