Presidential versus parliamentary: Political system and stock market volatility

Abstract

We utilize panel data from 60 countries to analyze whether the political system -presidential versus parliamentary-impacts stock market volatility. Our findings show that presidential systems exhibit lower volatility compared to parliamentary systems. We identify two main factors underlying this result: political stability and coalition dependence. Specifically, presidential systems demonstrate greater political stability and less coalition dependence, which contribute to reduced stock market volatility. Additionally, we show that the lower stock market volatility in presidential systems does not come at the cost of stock market performance. In fact, some evidence suggests that presidential systems positively enhance stock market performance. Our results are statistically significant and robust, accounting for subsamples and employing various specifications and econometric models, including a global portfolio that establishes each country's Beta. Collectively, our study highlights the significant role of political systems in the study of law and finance.