The Impact of Elections on European Financial Indices: Do Political Events in Europe Influence Market Returns?

Abstract

This thesis investigates whether legislative elections in European countries have a measurable impact on national stock market returns, with a comparative analysis of France and Germany. While the link between political uncertainty and market volatility is well-documented, this research focuses specifically on the electoral context and how different political systems condition market reactions.

The study uses multiple linear regression models applied to monthly data from 2004 to 2025, incorporating variables such as election periods, political uncertainty indices, macroeconomic indicators, and political orientation. Each country's main stock index (CAC 40 and DAX) is analyzed in relation to its institutional and electoral framework.

The results reveal significant differences between countries. In France, legislative elections consistently impact market returns, often negatively, due to the centralized nature of its semi-presidential system and the possibility of abrupt policy shifts. Germany shows no significant electoral effect, reflecting the stability and predictability provided by its coalition-based parliamentary model. The analysis also finds that the political orientation of governing parties may influence market outcomes, particularly in France, where left and right-wing victories tend to have negative effects.

These findings highlight the importance of institutional context in mediating how markets react to democratic events. Elections do matter, but their effects depend on how power is structured and exercised. The thesis also suggests that the political orientation of the parti in power influences domestic financial markets.

Further research is encouraged to examine other European countries and to explore cross-border electoral effects. By linking political structures to financial behavior, this study offers valuable insights for investors in understanding the evolving relationship between politics and financial markets in Europe.