Washington meets Wall Street: A Closer Examination of the Presidential Cycle Puzzle
AbstractThis paper tests the policitcal dimensions of the presidential cycle effect in U.S. financial markets. The presidential cycle effect states that average stock market returns are significantly higher in the last two years compared to the first two years of a presidential term. We confirm the robust existence of this cycle in U.S. stock markets as well as bond markets. As most rational theories to explain the cycle were falsified by earlier empirical work, this paper sets out to test the presidential cycle election (PCE) theory as an alternative explanation. The PCE theory states that incumbent parties and presidents have an incentive to manipulate the economy (via budget expansions, taxes, etc.) to remain in power. We formulate seven different propositions relating to fiscal, monetary, tax, and political implications of PCE theory. We find no statistically significant evidence confirming the PCE theory as a plausible explanation for the presidential cycle effect. The existence of the presidential cycle effect in U.S. financial markets thus remains a puzzle that cannot be easily explained by politicians mis-using their economic influence to remain in power.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-101/2.
Date of creation: 23 Oct 2008
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political economy; inefficient markets; market anomalies; calendar effects;
Other versions of this item:
- 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," LSF Research Working Paper Series 13-4, Luxembourg School of Finance, University of Luxembourg.
- Kräussl, Roman & Lucas, André & Rijsbergen, David R. & van der Sluis, Pieter Jelle & Vrugt, Evert B., 2010. "Washington meets Wall Street: A closer examination of the presidential cycle puzzle," CFS Working Paper Series 2010/06, Center for Financial Studies (CFS).
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-14 (All new papers)
- NEP-CBA-2008-12-14 (Central Banking)
- NEP-MAC-2008-12-14 (Macroeconomics)
- NEP-POL-2008-12-14 (Positive Political Economics)
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