DIVIDED GOVERNMENT AND POLITICAL RISK IN THE UNITED STATES

This paper examines the impact on political risk of having a divided government in the United States. We consider almost 60 years of data and use stockmarket return volatility as a measure of risk. Results show a positive and statistically significant relationship between periods of divided government and higher volatility. Divided governments are associated with an increase of 2.8 percentage points in annual volatility. Divided branch governments are found to lead to an increase of 4.1 percentage points in volatility, whereas a divided legislative government is linked to an increase in volatility of 5.8 percentage points. The President's party does not seem to be, in itself, a driver for market volatility. However, a Democrat President coinciding with a unified government leads to a significant decrease in volatility of 2.8 percentage points. Overall, our findings support the view that divided governments increase political risk. This result lends support to the balancing model and is difficult to reconcile with gridlock theory.