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This research thesis aims at examining the ability of prediction markets in event studies to account for the stock market behaviour and to accurately forecast its reaction to a political event. The 2016 US presidential election seems to be an interesting setting to conduct that sort of political event study, given the surprise caused by the unexpected election of Donald Trump as the 45th President of the United States.
The equity markets whose expected and actual reactions are analysed are the US, the European and the Developed Countries ex USA stock markets, respectively proxied by the S&P 500, the MSCI Europe and the MSCI World ex USA indexes.
Two methods are applied to conduct this political event study. On the one hand, the first method consists of using a multifactor model to obtain the equity market return not influenced by economic variables. A regression is then conducted to assess whether that part of the market return can be explained by prediction market prices implying a Trump win during the period encompassing pre-election events and the Election Day itself. On the other hand, the alternative method compares the reaction of equity markets to sudden changes in prediction market’s election probabilities following far-reaching election-related events in an attempt to estimate the stock market reaction to the future announcement of the election outcome.
The results from the first method reveal that election probabilities implied by the prediction market had a significant influence on the equity market behaviour, provided that only election-related events which sharply shifted the election odds were considered. The second method indicates that globally market participants were slightly more favourable to a Clinton administration during the last weeks leading to the election, even though her expected positive effect on equities was narrowing as the Election Day approached. While the global prediction market anticipation of a slightly lower equity market value if Trump came to win is consistent with the reaction of the Developed Countries ex USA stock market to the election results, it is not coherent with the response of both the US and the European stock markets. Nonetheless, anticipations about stock market responses to the election outcome were heading in the right direction as far-reaching events occured. Therefore, even though prediction market expectations about market reactions were not really accurate, their evolution was a good indicator of the trend followed by equity markets after the election results’ announcement.

event study --- prediction market --- stock market --- anticipation --- election --- Trump --- Clinton --- 2016 --- Sciences économiques & de gestion > Finance