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P. Rajaure: When Primaries Polarize: Candidate Ideological Variance and Option-Implied Volatility

July 10, 2025

This paper investigates a novel dimension of political uncertainty: the impact of ideological dispersion among viable U.S. presidential primary candidates on financial market volatility. We posit that the variance in policy platforms within a contested primary represents a distinct form of systematic risk priced by options markets. To test this, we construct a weekly Ideological Variance (IVAR) measure for both Democratic and Republican primaries from 2008 to 2020, integrating established candidate ideology scores with dynamic, market-based viability weights from political prediction markets. Our empirical framework, employing Ordinary Least Squares (OLS) and Exponential GARCH (EGARCH) models with an extensive set of financial, macroeconomic, and event-specific controls, reveals a robust and economically significant positive relationship between increases in Democratic primary IVAR and contemporaneous increases in the VIX index. This effect is particularly pronounced in open and contested primary cycles and exhibits a clear term structure, attenuating at longer implied volatility maturities. Conversely, Republican primary IVAR demonstrates a markedly weaker and less consistent association with market volatility during the sample period. These findings delineate a new channel through which electoral politics influence asset prices, identifying intra-party ideological variance as a discernible and priced component of political risk, with implications for our understanding of how markets process nuanced political information.

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