Is there a democratic premium?: Elections and financial markets in emerging countries

Over the past decades nearly all the major financial crises in developing countries have occurred in synchronization with electoral cycles. In the 2000's, this situation began to change, with many emerging countries experiencing a "decoupling" of their financial and electoral cycles. The presidential elections in Brazil, of October 2010 confirmed also this new trend, as the previous ones at the beginning of the year that took place in Colombia, Costa Rica or Chile. Politics matters for financial markets. The reverse is also true: Financial markets matter for politics. These complex links are particularly relevant in emerging markets. We focused on the links between the worlds of finance and politics. We specifically look at elections (as one of the major critical junctures in modern democracies) and the way portfolio managers react by investing or divesting during election times. One of the core questions we address-using unique and unexploited databases-is whether a democratic premium exists, in other words, whether financial markets (in this case portfolio managers of share and bond holdings) tend to react positively or negatively to elections in emerging markets and democracies.