The aim of this thesis is to examine the link between political preferences and both financial and social instability. In particular, the thesis investigates: (i) the impact of sovereign credit ratings on government support (Chapter 4); (ii) the impact of terrorist attacks on government support (Chapter 5); and (iii) stock markets’ reactions to elections (Chapter 6). These empirical chapters further the understanding of the effects of credit risk and extreme events on voters’ preferences, along with the role of political dynamics in explaining financial instability.

In order to explore these questions, a unique hand-collected dataset of polling results, which measure daily supports for political parties in European countries from 2000 to 2017 for Chapters 4 and 5, and from 2005 to 2019 for Chapter 6, is used. Polling data is then analysed jointly with other datasets, including sovereign credit ratings, terrorist attacks, elections, stock return, and stock volatility. Various econometric techniques are employed, including fixed effects model, propensity score matching, and event study.

The first empirical chapter shows that changes in sovereign credit ratings have an asymmetric impact on voters’ preferences, with negative rating events leading to significant decreases in government support, while positive rating events do not have a significant effect. This implies that sovereign ratings have political power by influencing the voters’ perceptions of incumbents’ quality. The second empirical chapter finds that citizens tend to rally together behind their leaders rather than rail against them in the aftermath of terrorist attacks despite the loss of lives and grave consequences for national economies and financial markets. This sheds light on public attitudes toward terrorism, with citizens providing more support for the government after terrorist attacks in order to fulfil their needs for protection. The last empirical chapter focuses on the sensitivity of stock markets to election uncertainty and election shock measured by polling results. In pre-election periods, stock volatility is affected by the likelihoods of various electoral outcomes. In post-election periods, stock volatility increases indicating that investors might be surprised by the election outcome. The accuracy of election prediction contributes to the magnitude of election shock.

Overall, this thesis contributes to the understanding of the determinants of government support, by offering new evidence of the political consequences of sovereign rating events and terrorist attacks. Additionally, the thesis provides insights into stock markets’ behaviour during elections and confirms the effect of political risks on stock markets. The thesis highlights the underlying mechanisms behind political and financial uncertainty, hence informs policy debates surrounding the best way to stabilise politics and financial markets.