How to measure that?
Options are ideally suited for this analysis for two reasons.
We find that at-the-money options whose lives span political events are on average 5% more expensive than neighbouring options that don't span the event. Furthermore, the well-known implied volatility smirk dramatically steepens around such events as investor demand for insurance against tail events soars. For example, among put options that are 10% out-of-the-money (and thus provide better protection against tail risk than at-the-money options), options whose lives span political events are more expensive by 16% compared to neighbouring options. We also find that political events are associated with abnormally high variance risk premia, so that insurance against variance risk is also more expensive ahead of such events.Politicians are expensive;
We show that political uncertainty commands a risk premium, especially when the economy is weak. By raising the firms’ cost of capital, political uncertainty depresses investment and real activity. Furthermore, by raising risk premia, political uncertainty destroys market value. Perhaps we should ask reckless politicians to chip in.Or come up with better ways to control how large a role politics plays in our lives.