The Political Sources of Financial Risk: Lessons from a Consensus Democracy

This study examines the relationship between democratic politics and financial risk. Low financial risk is crucial to any well-functioning economy, as it encourages investment, facilitates growth, and therefore enhances overall economic performance. However, little is known about the political sources driving fluctuations around the expected value of an investment, i.e. financial risk. We analyze whether and how pre-electoral, post-electoral, and institutional factors affect financial risk in Germany, a consensus democracy which offers a rich set of democratic processes potentially relevant to uncertainty on its financial markets. Our results show that expected and current government partisanship, divided government, grand coalition governments, as well as periods of coalition formation are important determinants of financial risk even after controlling for a comprehensive set of alternative economic, and event-specific sources of uncertainty on the financial marketplace.