The Spanish Second Republic was a unique experiment of democratization in interwar Spain, which was characterized by extreme levels of political uncertainty. In response to this uncertainty, we find that investors sold stocks in favor of government bonds. In fact, political uncertainty had a negative effect on the aggregate stock market index, a positive effect on stock market volatility, and significant differences in the cross-section of stock return, consistent with their exposure to the uncertainty. This suggests that Spanish investors did not seem to perceive a soviet-style social revolution as a credible threat.

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