Informational Feedback between Voting and Speculative Trading

This paper develops a model to investigate the interaction between collective decision-making in voting and financial speculation. Protesting voters demand policy reforms by voting against the incumbent, but too many opposing votes result in an unfavorable outcome --- political regime change. Traders speculate on the change of political regime. The size of the speculation informs voters about the electorate's composition, thereby influencing the outcome of the election. We find that, in equilibrium, the strategic substitutability of protest voting makes speculations strategic substitutes via informational feedback, thereby incentivizing speculators to trade less (more) on the correlated public signal (conditionally independent private signal). This strengthens the role of financial markets in providing information and amplifies the impact of financial market sentiment on ex-post political outcomes. We further discuss how our theory can provide a mechanism for rationalizing Brexit's unexpected victory and the financial market volatility surrounding the referendum