Democracy and Markets in a Partially Globalized World: Local and Global Financial Market Responses to Elections in Developing Countries

Global market responses to elections are at the core of debates about financial globalization in developing countries. While existing research focuses on the ability of global markets to reward and punish national governments, much less is known about the role of domestic finance. I argue that domestic financial markets (1) react more strongly to elections than global markets due to excessive exposure to political risk at home and (2) lead global market responses to elections where domestic investors have an information advantage. I find support for these hypotheses using data on country fund pricing for major emerging markets between 1988 and 2015. The results show swifter and more dramatic reactions by domestic investors, which are transmitted to international markets. The findings underscore the underappreciated role of domestic investors in state-market relations under limited globalization.