This paper focuses on the effects of political uncertainty and the political process on implied stock market volatility during US presidential election cycles. Using monthly Iowa Electronic Markets data over five elections, we document that stock market uncertainty, as measured by the VIX volatility index, increases along with positive changes in the probability of success of the eventual winner. The association between implied volatility and the election probability of the eventual winner is positive even after controlling for changes in overall election uncertainty. These findings indicate that the presidential election process engenders market anxiety as investors form and revise their expectations regarding future macroeconomic policy.

This paper examines the linkage between bank liquidity creation and systemic risk. Using quarterly data on U.S. bank holding companies from 2003 to 2016, we document that liquidity creation decreases systemic risk at the individual bank level after controlling for bank size, asset risk, and other bank-specific attributes. After decomposing systemic risk into bank-specific tail risk and systemic linkage, we find that the riskiness of individual banks is negatively linked to liquidity creation. Nevertheless, our results also demonstrate that liquidity creation strengthens the systemic linkage of individual banks to severe shocks in the financial system. Overall, our empirical findings demonstrate that the level of liquidity creation may have important implications for financial stability and the prudential supervision of financial institutions.