Mid-term Elections

Mid-term elections are not usually very memorable affairs. The voter turnout is much lower than for presidential elections (since 1960, voter turnout has averaged around 40% versus 60%). It seems likely that voter interest is atypically high this year, but that isn't the point of this post.

What I want to know is, "How do mid-terms affect volatility?" It is generally true that volatility declines after scheduled events like this. It has been shown to be true for presidential elections, but it also applies to crop reports, earnings announcements and big economic releases. My guess was that mid-terms also produce a similar effect. The average voter might not be interested, but volatility prices are set by the marginal volatility trader not the average voter.

Vix data only goes back to 1990. This isn't a particularly large sample, but it does cover some significant political issues including two gulf wars, the Lewinsky affair, a disputed election and the tea party formation.

I looked at the change in the Vix from election night onward. The results are shown below.

So since 1990 the Vix drops after a mid-term election.

Whether you find this evidence compelling is up to you. Personally I wouldn't do a new trade based on this, but if I was short volatility for some other reason I wouldn't get out.

Euan SinclairComment