Political risk and stock price volatility: The case of Hong Kong

In this paper, we study the impact of political news on the stock market volatility in Hong Kong. Two indices are used: blue-chip shares are proxied by the Hang Seng Index, and China-related stocks are proxied by the Red-Chip Index. The results indicate that political news increases the stock volatility of both blue-chip and red-chip shares. Also, we find that favorable (unfavorable) political news is correlated to positive (negative) returns for the Hang Seng Index. In contrast, political news, good or bad, does not affect the returns of the red-chip shares. We employ a substitution effect to explain our findings and conclude that red-chip stocks can be considered a safe haven from political shocks for investors in Hong Kong.