The cost of political uncertainty

Policy uncertainty costs real money. That’s the conclusion of a Chicago Booth paper that tries to quantify the cost to markets of political risk. In a study of options prices from 20 countries, researchers found out that prices of options spanning disruptive political events are on average 5.1% higher than options that don’t overlap with a period of political risk. In weaker economies, where policy changes are more relevant after a political event, this risk margin could get to as high as 8%. How much does it cost economies? They estimated that insuring assets equivalent the S&P500’s total market value in 2014 against one month of policy uncertainty would cost as much as two Hubble space telescopes — or clean water for the entire planet plus two space ships. (Watch, runtime: 1:34)