Minute-by-Minute: Financial Markets' Reaction to the 2020 U.S. Election

TL;DR

This paper analyzes how major financial indicators responded to the 2020 U.S. election, revealing correlations with election outcome probabilities and decomposing market reactions into uncertainty reduction and political outcome expectations.

Contribution

It introduces a detailed decomposition of market reactions to election uncertainty and outcome probabilities, highlighting differential responses to presidential and Senate elections.

Findings

Markets exhibited 'risk-on' behavior as election results became clearer.

Bond prices were highly sensitive to the combined Democratic control of the Senate and Presidency.

Decomposition showed markets reacted to both uncertainty reduction and outcome probabilities.

Abstract

We find striking correlations between the presidential election outcome probability and major financial indicators, including USD currency pairs, bond prices, stock index futures, and a market volatility measure. The correlations are consistent with 'risk-on' behavior in markets, a term which describes investors moving toward riskier asset classes, as the election results became clearer. Further, we decompose the market reaction into a 'reduction in uncertainty' component and a 'probability of a Democratic party presidency' component. This decomposition reveals how markets reacted to the increasing certainty of the outcome as election results came in. Finally, we analyze the differing market reactions to the presidential election and the Senate election, including data from the unique Georgia runoffs, and demonstrate that bond prices were particularly sensitive to the probability of a combined Democratic Senate and Presidency.