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Is the presidential premium spurious?

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  • Sy, Oumar
  • Zaman, Ashraf Al

Abstract

A hotly debated question in finance is whether the higher stock returns under Democratic presidencies relative to Republican presidencies represent abnormal return, risk premium, or mere statistical fluke. This paper investigates whether this presidential premium is due to spurious-regression bias, data mining, or economic policy uncertainty. Decomposing the presidential premium into expected and unexpected components, we find that over two-thirds of the premium is unexpected, which is inconsistent with the spurious regression bias explanation. The presidential premium is not explained by data mining given that it persists in the post-publication period, and remains robust even if we purge returns of their covariation with economic policy uncertainty.

Suggested Citation

  • Sy, Oumar & Zaman, Ashraf Al, 2020. "Is the presidential premium spurious?," Journal of Empirical Finance, Elsevier, vol. 56(C), pages 94-104.
    • Handle: RePEc:eee:empfin:v:56:y:2020:i:c:p:94-104
    DOI: 10.1016/j.jempfin.2020.01.001
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    Cited by:

    1. Killins, Robert N. & Ngo, Thanh & Wang, Hongxia, 2022. "Politics and equity markets: Evidence from Canada," Journal of Multinational Financial Management, Elsevier, vol. 63(C).
    2. Chrétien, Stéphane & Fu, Hsuan, 2023. "Presidential cycles in international equity flows and returns," Finance Research Letters, Elsevier, vol. 53(C).

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    More about this item

    Keywords

    Presidential premium; Presidential puzzle; Spurious regression bias; Data mining; Economic policy uncertainty;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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