The connection between stock market prices and political support: evidence from Japan

ABSTRACT

This study analyzes the causality between stock market prices and political support, with a focus on Japan. Japan offers a critical setting to control for the causality of political connectedness, because electoral institutions proscribe corporate donations and politicians holding concurrent corporate executive positions and corporate donations. By narrowing the causality from stock market trends to political components, a vector autoregressive linear non-Gaussian acyclic model reveals that stock prices are the cause (parent) and ruling party support is the outcome (child).

KEYWORDS:

• Stock prices
• political support VAR-LiNGAM
• consumer confidence index

JEL CLASSIFICATION:

• C32
• E44
• G18
• N25

Acknowledgments

The author acknowledges Kazuo Shigemasu's and Kenneth M. McElwain's comments and financial aid from the Japan Society for Promotion of Science, Murata Foundation, and Centre for Studies on Political Behaviour at Kwansei Gakuin University.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ The mutual independence of the structural shock (error terms) is a slightly stronger assumption and complete statistical independence of the $n$ component processes, ${\in }_{i,t}$, $t\in \mathbb{Z}$, $i=1,\dots ,n$, is assumed (Lanne, Meitz, and Saikkonen 2017, 299). This independence assumption is stronger and, thus, different from the error temrs only being uncorrelated. It also embraces the weak assumption of ${\in }_{i,t}$ and ${\in }_{j,t}$ being independent ($i\ne j$).

² That is, it allows only one error term to follow the Gaussian distribution among the respective equations.

³ Details of the estimation process are in accordance with Moneta et al. (2013, 715).

⁴ Considering the cointegrated variables in the eight variables system, the VECM estimation is used instead of the simple reduced form VAR.

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science [15K16996,19K13615].