Political Geography and Stock Market Volatility: The Role of Political Alignment Across Sentiment Regimes

Abstract

ABSTRACT We study the nexus between political geography and stock market volatility by examining the interrelation between political geography and the predictive relation between the state‐ and aggregate‐level stock market volatility via recently constructed measures of political alignment. Using data for 1994–2023 and random forests, we show that the importance of the state‐level volatilities as drivers of aggregate volatility displays considerable variation in the cross‐section and across time. Stronger political alignment of a state with the ruling party is associated with a lower contribution of the state's volatility to aggregate volatility. This negative link is significant during high‐sentiment periods.