• In countries with more open and democratic institutions, social unrest events have a negligible impact on stock market returns.
  • In countries with more authoritarian regimes, the effect is large and negative.
  • On average, stock market returns fall by 2% within 3 days, and by about 4% in the following month, when there is unrest in authoritarian countries.
  • In countries with high standards of governance, social unrest does not lead to uncertainty about future economic performance.

What happens to stock markets when social unrest—such as mass protests and riots—occurs? Are investors scared-off by the disorder? Or are they buoyed by the prospect of positive, popular change in response to unrest?

Our chart of the week, drawn from our recent IMF staff working paper, uses a new dataset of 156 social unrest events during 2011–20 to shed some light on these questions. It shows that in countries with more open and democratic institutions, social unrest events have a negligible impact on stock market returns (blue line). But in countries with more authoritarian regimes, the effect is large and negative: on average, stock market returns fall by 2 percent within 3 days, and by about 4 percent in the following month (black line).

These findings are consistent with real-world examples. For instance, stock markets in France—a country with strong and open institutions—were largely unmoved in the days after the Yellow Vest protests began in late 2018.

Of course, differences across countries could occur for many reasons other than political institutions. So, we also check that this relationship holds after accounting for other factors that might be correlated with the degree of institutional authoritarianism, including the severity of unrest and the country’s income level.

a chart showing the link between social unrest and the stock market
Social unrest has a big impact on stock markets.
Image: IMF

To dig deeper into what sort of institutions might be important, the paper runs further experiments using the six measures of social and political institutions that form the World Bank Governance Indicators. Of these, two factors play a crucial role in mitigating negative stock market reactions to social unrest events: popular participation in government, and the ability of the government to regulate markets in ways that promote private sector development.

Food

What is the World Economic Forum doing to help ensure global food security?

Two billion people in the world currently suffer from malnutrition and according to some estimates, we need 60% more food to feed the global population by 2050. Yet the agricultural sector is ill-equipped to meet this demand: 700 million of its workers currently live in poverty, and it is already responsible for 70% of the world’s water consumption and 30% of global greenhouse gas emissions.

New technologies could help our food systems become more sustainable and efficient, but unfortunately the agricultural sector has fallen behind other sectors in terms of technology adoption.

Launched in 2018, the Forum’s Innovation with a Purpose Platform is a large-scale partnership that facilitates the adoption of new technologies and other innovations to transform the way we produce, distribute and consume our food.

With research, increasing investments in new agriculture technologies and the integration of local and regional initiatives aimed at enhancing food security, the platform is working with over 50 partner institutions and 1,000 leaders around the world to leverage emerging technologies to make our food systems more sustainable, inclusive and efficient.

Learn more about Innovation with a Purpose's impact and contact us to see how you can get involved.

What sort of investor behavior might explain these patterns?

One clue comes from the volume of shares traded, which increases sharply following a severe unrest event. As more trades occur when investors disagree on the value of an asset, a higher trading volume typically reflects more uncertainty over the outlook. This result suggests that social unrest affects stock market returns through an indirect information channel rather than via direct disruption to economic activity.

Together, these results imply that in countries with high standards of governance, social unrest does not lead to more disagreement and uncertainty about future economic performance. This perhaps reflects the ability of more open institutions to reconcile divergent opinions and find compromises.

In contrast, this flexibility may be missing in more authoritarian systems. There, institutions may be less able to adapt to social problems, meaning that unrest can lead to rising fears of further uncertainty and deter investors.