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The Presidential Puzzle: Political Cycles and the Stock Market

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Author Info
Pedro Santa-Clara (The Anderson School, University of California, Los Angeles)
Rossen Valkanov (The Anderson School, University of California, Los Angeles)
Abstract

The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The difference comes from higher real stock returns and lower real interest rates, is statistically significant, and is robust in subsamples. The difference in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no difference in the riskiness of the stock market across presidencies that could justify a risk premium. The difference in returns through the political cycle is therefore a puzzle. Copyright (c) 2003 by the American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 58 (2003)
Issue (Month): 5 (October)
Pages: 1841-1872
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Handle: RePEc:bla:jfinan:v:58:y:2003:i:5:p:1841-1872

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  1. Jürgen Huber & Michael Kirchler, 2008. "Corporate Campaign Contributions as a Predictor for Abnormal Stock Returns after Presidential Elections," Working Papers 2008-18, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
  2. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2006. "Partisan impacts on the economy: evidence from prediction markets and close elections," Working Paper Series 2006-08, Federal Reserve Bank of San Francisco. [Downloadable!]
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  3. Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz, 2006. "Stock market volatiltity around national elections," MPRA Paper 302, University Library of Munich, Germany, revised Nov 2006. [Downloadable!]
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  4. R. Kraeussl & A. Lucas & D. Rijsbergen & P.J. van der Sluis & E. Vrugt, 2008. "Washington meets Wall Street: A Closer Examination of the Presidential Cycle Puzzle," Tinbergen Institute Discussion Papers 08-101/2, Tinbergen Institute. [Downloadable!]
  5. Andrea Mattozzi, 2008. "Can we insure against political uncertainty? Evidence from the U.S. stock market," Public Choice, Springer, vol. 137(1), pages 43-55, October. [Downloadable!] (restricted)
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  6. Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz, 2006. "Political orientation of government and stock market returns," MPRA Paper 307, University Library of Munich, Germany, revised Nov 2006. [Downloadable!]
  7. Mattozzi, Andrea., 2005. "Policy uncertainty, electoral securities and redistribution," Working Papers 1229, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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  8. Boutchkov, Maria & Doshi, Hitesh & Durnev, Art & Molchanov, Alexander, 2008. "Politics and Volatility," CEI Working Paper Series 2008-10, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  9. Jörg Döpke & Christian Pierdzioch, 2004. "Politics and the Stock Market — Evidence from Germany," Kiel Working Papers 1203, Kiel Institute for the World Economy. [Downloadable!]
  10. Sean D. Campbell & Canlin Li, 2004. "Alternative estimates of the presidential premium," Finance and Economics Discussion Series 2004-69, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Steven A. Block & Burkhard N. Schrage & Paul M. Vaaler, 2003. "DEMOCRACY’S SPREAD: Elections and Sovereign Debt in Developing Countries," William Davidson Institute Working Papers Series 2003-575, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  12. Steven Block & Burkhard N. Schrage & Paul M. Vaaler, 2003. "Democratization’s Risk Premium: Partisan and Opportunistic Political Business Cycle Effects on Sovereign Ratings in Developing Countries," William Davidson Institute Working Papers Series 546, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  13. Roland Füss & Michael Bechtel, 2008. "Partisan politics and stock market performance: The effect of expected government partisanship on stock returns in the 2002 German federal election," Public Choice, Springer, vol. 135(3), pages 131-150, June. [Downloadable!] (restricted)
  14. James Cooley, 2009. "Stock Market Returns and Partisan Political Business Cycles," Departmental Working Papers 0902, Southern Methodist University, Department of Economics. [Downloadable!]
  15. Sean Campbell & Canlin Li, 2003. "Per Capita Consumption, Luxury Consumption and the Presidential Puzzle: A Partial Resolution," Working Papers 2003-18, Brown University, Department of Economics. [Downloadable!]
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