Populism and Financial Markets: Forward-Looking Insights from Option-Implied Measures
Project Description
This project investigates how populism influences financial markets by leveraging option-implied information and improved measures of political risk. Populist movements have re-shaped the political landscape across Europe and increasingly affect investor behaviour, risk perceptions, and asset pricing. Traditional studies focus mainly on volatility around elections and populist outcomes: volatility typically rises around electoral events (Kelly, Pástor, & Veronesi, 2016), while populist victories themselves shift market perceptions of risk (Stöckl & Rode, 2021; Hartwell, 2021). Yet such approaches capture only part of the market response.
We extend this analysis by incorporating forward-looking measures such as option-implied expected returns and higher-order risk-neutral moments, which provide a richer picture of tail risks, asymmetries, and extreme events. In addition, we apply a machine learning-based populism index that distinguishes between ideational and rhetorical dimensions. Together, these innovations provide a more comprehensive framework for measuring political risk, advancing academic research while offering practical insights for investors and policymakers.
We extend this analysis by incorporating forward-looking measures such as option-implied expected returns and higher-order risk-neutral moments, which provide a richer picture of tail risks, asymmetries, and extreme events. In addition, we apply a machine learning-based populism index that distinguishes between ideational and rhetorical dimensions. Together, these innovations provide a more comprehensive framework for measuring political risk, advancing academic research while offering practical insights for investors and policymakers.
Relevance to Liechtenstein
Liechtenstein is an internationally significant financial center with a strong presence of investment funds, banks, and institutional investors actively operating in global markets. This project is particularly relevant for Liechtenstein as it provides new insights into how populist developments affect financial markets, supporting local investors, fund managers, and policymakers. By leveraging option-implied information and a machine learning-based populism index, risks can be identified in advance, enabling informed decision-making. Furthermore, the project methodology can be integrated into courses and seminars at the University of Liechtenstein, giving students hands-on experience with modern approaches to political risk assessment.
