How Stock Markets Respond to Social Unrest

IMF Blog, May 10, 2021

Source details

Study draws on a new dataset of 156 social unrest events during 2011–20.
Uses event analysis to measure stock market reactions to social unrest across countries with varying political institutions.
Authors: Philip Barrett, Sophia Chen. Publication date: May 10, 2021.

In countries with more open and democratic institutions, social unrest events have a negligible impact on stock market returns (blue line).
In countries with more authoritarian regimes, the effect is large and negative (black line):
- Stock market returns fall by 2 percent within 3 days.
- Stock market returns fall by about 4 percent in the following month.
Results hold after accounting for other factors that might correlate with institutional authoritarianism, including the severity of unrest and the country’s income level.
Example: Stock markets in France were largely unmoved in the days after the Yellow Vest protests began in late 2018.

Analysis uses the six measures of social and political institutions that form the World Bank Governance Indicators.
Two specific institutional factors that mitigate negative stock market reactions to social unrest:
- Popular participation in government.
- The ability of the government to regulate markets in ways that promote private sector development.
Trading volume evidence:
- Volume of shares traded increases sharply following a severe unrest event.
- Higher trading volume typically reflects more disagreement and uncertainty over asset values, suggesting an information channel.
Interpretation:
- In countries with high standards of governance, social unrest does not lead to more disagreement and uncertainty about future economic performance, possibly because open institutions can reconcile divergent opinions and find compromises.
- In more authoritarian systems, institutions may be less able to adapt to social problems, so unrest can lead to rising fears of further uncertainty and deter investors.

Investor behavior appears driven by information and uncertainty rather than direct economic disruption from unrest.
Strengthening popular participation and market-regulating capacity may reduce adverse market reactions to social unrest by lowering uncertainty.
Monitoring trading volume after unrest can provide early signals of increasing disagreement and uncertainty among investors.

Source: IMF Blog — "How Stock Markets Respond to Social Unrest" (Philip Barrett, Sophia Chen, May 10, 2021).