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Political Uncertainty and Asset Prices: Evidence from Hong Kong Political Crisis

Triggered by the Hong Kong government’s action to amend the extradition law, the political crisis happened in Hong Kong, raising substantial local political uncertainty during the second half year of 2019. Measuring the daily political uncertainty shocks by the violence intensity reported by the local newspapers, we document that Hong Kong stock prices drop more on the days with higher political uncertainty, especially for the firms with higher political risk exposures. By focusing on the AH dual-listed stocks and comparing the differential effect of the political uncertainty on their returns in Hong Kong and Mainland China stock market, we find that stock prices in Hong Kong are much more negatively affected by the political uncertainty than the counterparts in Mainland China, though they have same fundamentals. By further ruling out the expected cash flow effect, our results provide evidence that political uncertainty influence asset prices through the discount rate effect. Utilizing the Stock Connect Programs to proxy for the exposure to investors in the other market, we show that the political uncertainty effect on A shares is more negative for the stocks with higher exposure to foreign investors, while the effect on H shares is less negative for the stocks with higher exposure to mainland investors.