Regional Political Climate and Individual Portfolios

In this paper I investigate the relationship between the local political climate and regional heterogeneity in the portfolio composition of individual investors. I find that right-wing supporters are more likely to participate in financial markets and hold a larger share of their wealth in securities portfolios. A move from moderate left to moderate right increases the probability to be invested in the market by 10%. Consistent with the theory of political conservatism, in regions with greater support for right-wing parties, individuals invest more in safe securities (by 3% in bonds and funds) and less in risky assets (by 8% in derivatives). Together with the measures of political surprise and uncertainty, political climate has significant impact on the home bias of individual investors. My results provide evidence that political values play an important role in shaping the financial decisions of households