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The Transmission of U.S. Election Cycles to International Stock Returns

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  • Stephen R Foerster

    (University of Western Ontario)

  • John J Schmitz

    (University of Western Ontario)

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    Abstract

    This paper examines the international pervasiveness and importance of the previously uncovered four-year U.S. election cycle whereby U.S. stock returns are significantly lower, and negative, in year 2 following U.S. presidential election relative to years 1, 3 and 4. All eighteen countries examined over the 1957 to 1996 time period possess lower local currency stock market capital gains returns in year 2 (-0.66%) relative to the average capital gains of years 1, 3 and 4 (11.68%). These predominately lower year 2 returns are shown to be robust in conditional expected return regressions which include both local macroeconomic variables as well as U.S. macroeconomic, fiscal and monetary policy variables. In addition, we find that the U.S. dollar trends to depreciate more in year 2 of the election cycle. We conclude that the U.S. election cycle variable is either proxying for information variables not included in our model, or the U.S. election cycle variable is capturing some form of U.S. and international market sentiment. That is, the U.S. election cycle may be an important nondiversifiable political factor in the determination of international conditional expected stock returns.© 1997 JIBS. Journal of International Business Studies (1997) 28, 1–27

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Journal of International Business Studies.

    Volume (Year): 28 (1997)
    Issue (Month): 1 (March)
    Pages: 1-27

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    Handle: RePEc:pal:jintbs:v:28:y:1997:i:1:p:1-27

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    Cited by:
    1. 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, Tinbergen Institute 08-101/2, Tinbergen Institute.
    2. Chrétien, Stéphane & Coggins, Frank, 2009. "Election outcomes and financial market returns in Canada," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 20(1), pages 1-23, March.
    3. Wong, Wing-Keung & McAleer, Michael, 2009. "Mapping the Presidential Election Cycle in US stock markets," Mathematics and Computers in Simulation (MATCOM), Elsevier, Elsevier, vol. 79(11), pages 3267-3277.
    4. Lobo, Bento J., 1999. "Jump risk in the U.S. stock market: Evidence using political information," Review of Financial Economics, Elsevier, Elsevier, vol. 8(2), pages 149-163.
    5. Dopke, Jorg & Pierdzioch, Christian, 2006. "Politics and the stock market: Evidence from Germany," European Journal of Political Economy, Elsevier, Elsevier, vol. 22(4), pages 925-943, December.
    6. Yi-Hsien Wang & Jui-Cheng Hung & Yen-Hsien Lee & Chung-Chu Chuang, 2012. "Computing regression quantiles to analysis the relationship between market behavior and political risk," Quality & Quantity: International Journal of Methodology, Springer, Springer, vol. 46(4), pages 1047-1055, June.
    7. Yi-Hsien Wang & Chung-Chu Chuang, 2009. "Selecting the portfolio investment strategy under political structure change in United States," Quality & Quantity: International Journal of Methodology, Springer, Springer, vol. 43(5), pages 845-854, September.
    8. Chin-Tsai Lin & Yi-Hsien Wang, 2005. "An Analysis of Political Changes on Nikkei 225 Stock Returns and Volatilities," Annals of Economics and Finance, Society for AEF, vol. 6(1), pages 169-183, May.
    9. 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, Tinbergen Institute 08-101/2, Tinbergen Institute.
    10. Yi-Hsien Wang & Chin-Tsai Lin, 2009. "The political uncertainty and stock market behavior in emerging democracy: the case of Taiwan," Quality & Quantity: International Journal of Methodology, Springer, Springer, vol. 43(2), pages 237-248, March.
    11. Bohl, Martin T. & Gottschalk, Katrin, 2006. "International evidence on the Democrat premium and the presidential cycle effect," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 17(2), pages 107-120, August.
    12. Pantzalis, Christos & Stangeland, David A. & Turtle, Harry J., 2000. "Political elections and the resolution of uncertainty: The international evidence," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(10), pages 1575-1604, October.
    13. Booth, James R. & Booth, Lena Chua, 2003. "Is presidential cycle in security returns merely a reflection of business conditions?," Review of Financial Economics, Elsevier, Elsevier, vol. 12(2), pages 131-159.
    14. Chung-Chu Chuang & Yi-Hsien Wang, 2009. "Developed stock market reaction to political change: a panel data analysis," Quality & Quantity: International Journal of Methodology, Springer, Springer, vol. 43(6), pages 941-949, November.
    15. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, Elsevier, vol. 43(C), pages 188-199.
    16. Roman Kraussl & Andre Lucas & David R. Rijsbergen & Pieter Jelle van der Sluis & Evert B. Vrugt, 2013. "Washington Meets Wall Street: A Closer Examination of the Presidential Cylce Puzzle," CREA Discussion Paper Series 13-4, Center for Research in Economic Analysis, University of Luxembourg.
    17. Alvarez-Ramirez, J. & Rodriguez, E. & Espinosa-Paredes, G., 2012. "A partisan effect in the efficiency of the US stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 391(20), pages 4923-4932.

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