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Predicting the Presidential Election Cycle in US Stock Prices: Guinea Pigs versus the Pros

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  • Manfred Gärtner

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Abstract

The notion that US stock prices follow a pattern that is synchronized with the rhythm of presidential elections has been a topic among financial investors for a long time. Academic work exists that supports this idea, quantifies the pattern, and has demonstrated its robustness over several decades and across parties in power. This paper takes the existence and robustness of this presidential election cycle for granted and asks whether individuals exploit it when asked to predict stock prices. It considers and contrasts two types of such forecasts: Those made by professionals included in the Livingston survey; and those made by students in a laboratory experiment. One key result is that neither group fares particularly well, though participants in the lab experiment clearly outperformed the professionals.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2008/DP-06-Ga.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2008 with number 2008-06.

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Length: 21 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:usg:dp2008:2008-06

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Keywords: Livingston survey; experiment; expectations; forecast; presidential election cycle; stock prices;

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  1. Dokko, Yoon & Edelstein, Robert H, 1989. "How Well Do Economists Forecast Stock Market Prices? A Study of the Livingston Surveys," American Economic Review, American Economic Association, vol. 79(4), pages 865-71, September.
  2. Umstead, David A, 1977. "Forecasting Stock Market Prices," Journal of Finance, American Finance Association, vol. 32(2), pages 427-41, May.
  3. Gartner, Manfred & Wellershoff, Klaus W., 1995. "Is there an election cycle in American stock returns?," International Review of Economics & Finance, Elsevier, vol. 4(4), pages 387-410.
  4. Ernan Haruvy & Yaron Lahav & Charles N. Noussair, 2007. "Traders' Expectations in Asset Markets: Experimental Evidence," American Economic Review, American Economic Association, vol. 97(5), pages 1901-1920, December.
  5. Harrison Hong & Jeremy C. Stein, 2007. "Disagreement and the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 109-128, Spring.
  6. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," NBER Working Papers 13189, National Bureau of Economic Research, Inc.
  7. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  8. De Bondt, Werner F M & Thaler, Richard H, 1989. "A Mean-Reverting Walk Down Wall Street," Journal of Economic Perspectives, American Economic Association, vol. 3(1), pages 189-202, Winter.
  9. Wong, Wing-Keung & McAleer, Michael, 2009. "Mapping the Presidential Election Cycle in US stock markets," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(11), pages 3267-3277.
  10. Booth, James R. & Booth, Lena Chua, 2003. "Is presidential cycle in security returns merely a reflection of business conditions?," Review of Financial Economics, Elsevier, vol. 12(2), pages 131-159.
  11. Thaler, Richard H, 1987. "Seasonal Movements in Security Prices II: Weekend, Holiday, Turn of the Month, and Intraday Effects," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 169-77, Fall.
  12. Andrew B. Abel & Janice C. Eberly & Stavros Panageas, 2007. "Optimal Inattention to the Stock Market," American Economic Review, American Economic Association, vol. 97(2), pages 244-249, May.
  13. Balvers, Ronald J & Cosimano, Thomas F & McDonald, Bill, 1990. " Predicting Stock Returns in an Efficient Market," Journal of Finance, American Finance Association, vol. 45(4), pages 1109-28, September.
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