Tuesday, November 13, 2012

The Stock Market Effect

This is necessarily a very approximate, first-order view of things, but consider the following facts:

  1. The day of the election, InTrade estimated that President Obama had a 70% chance of winning re-election.
  2. The day after the election, the Dow Jones fell about 300 points.

Suppose that all other election-day news had an effect worth a drop of N points on the DJIA. Then the Obama effect was worth a drop of 300-N points. That result had a 70% chance of occurring (assuming efficient markets and sufficient arbitrage). That implies that had Mitt Romney won, the DJIA would have risen by approximately 7/3 × (300-N) = 700-(7/3)N points.

It's probably not fair to assume N=0, in which case the Romney effect would have been +700 points. But even if N=150, a Romney election would have worth +350 points. Instead, it dropped 150 points (due to Obama, plus another 150 due to other news). That's a 500-point swing, or about 4%.

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