2005 Franklin L. Burdette/Pi Sigma Alpha Award

for the best paper presented at the previous year's annual meeting. Supported by Pi Sigma Alpha.

Award Committee:  Ronald B. Rapoport, College of William & Mary, chair; Fabrice E. Lehoucq, Centro de Investigacion y Docencia Economics' (CIDE); and Herbert F. Weisberg, Ohio State University.

Recipients:  William Bernhard,  University of Illinois, and Devid LeBlang, University of Colorado.

Paper: "When Markets Party: Stocks, Bonds and Cabinet Formations"

Citation: In "When Markets Party: Stocks, Bonds and Cabinet Formations," William Bernhard and Devid LeBlang address a central issue in political economy and political science by exploring how political events affect financial markets.  In addressing this issue, they utilize an impressive combination of theoretical, empirical, and statistical techniques and approaches.  They rely upon Laver and Shepsle's well-known model of cabinet formation to model the political side of the equation.  This model identifies "strong" parties in parliamentary democracies as those that, because of the distribution of vote shares and preferences, gets to participate in every potential cabinet preferred by a majority of legislators.  Bernhard and Leblang utilize measures of party ideological positions derived from empirical party manifesto data, created by Ian Budge et.al. to model in which cases strong parties exist.   Utilizing panel regression models they then show that abnormal returns for stocks do not routinely occur during times of cabinet formation, but only when there is no "strong" party in the system.  On the other hand, the long-term component of 10-year bonds insulates these from lower abnormal returns during the cabinet formation process, even in the absence of a "strong" party.   Thus, Bernhard and LeBlangs's sophisticated theoretical and empirical methods allow them to explain when the cabinet formation process - the central political transaction in parliamentary systems -- leads to financial and market uncertainty, and when it does not. The end result of the paper is to uncover the mechanism that leads from political uncertainty to financial instability, one that is hidden from even repeated observation of these events and trends. The paper, and its conclusions, are of importance to political scientists, economists, financial analysts and policymakers, and it can be expected to stimulate other work in the field.