Pre-electoral coalition agreement from the Black–Scholes point of view

TL;DR

This paper applies financial modeling concepts like the Black-Scholes model to analyze political coalition agreements and voter support dynamics.

Contribution

The novelty lies in using stochastic financial models to determine reasonable support levels for political coalitions to gain representation.

Findings

Political party support can be modeled as a stochastic process similar to stock price dynamics.

Coalition agreements can be analyzed using financial modeling to determine fair support thresholds.

Findings are applied to the June 2023 Montenegro elections with multiple political actors.

Abstract

A political party can be considered as a company whose value depends on the voters support i.e. on the percentage of population supporting the party. Dynamics of the support is thus as a stochastic process with a deterministic growth rate perturbed by a white noise modeled through the Wiener process. This is in an analogy with the option modeling where the stock price behaves similarly as the voters’ support. While in the option theory we have the question of fair price of an option, the question that we ask here is what is a reasonable level of support that the coalition of a “major” party (safely above the election threshold) and a “minor” party (under or around the election threshold) should achieve in order for the “minor” party to get one more representative. We shall elaborate some of the conclusions in the case of recent elections in Montenegro (June, 2023) which are particularly interesting due to lots of political subjects entering the race.

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