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Political uncertainty, market anomalies and Presidential honeymoons

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  • Chan, Kam Fong
  • Gray, Philip
  • Gray, Stephen
  • Zhong, Angel

Abstract

The first 100 days of a newly-elected President's administration are often a period of substantial and concentrated policy change. This paper shows that measures of uncertainty and risk aversion rise sharply during Presidential honeymoons. Consistent with theoretical models that suggest that investors demand compensation for bearing heightened political risk, we document striking spread returns to value, investment and profitability anomalies during honeymoons. For example, the book-to-market value premium averages 3.51% per month during Presidential honeymoons, yet only 0.27% per month at other times. These findings survive numerous robustness checks. Nonetheless, establishing a direct link between escalating political risk and equity returns proves challenging.

Suggested Citation

  • Chan, Kam Fong & Gray, Philip & Gray, Stephen & Zhong, Angel, 2020. "Political uncertainty, market anomalies and Presidential honeymoons," Journal of Banking & Finance, Elsevier, vol. 113(C).
  • Handle: RePEc:eee:jbfina:v:113:y:2020:i:c:s0378426620300169
    DOI: 10.1016/j.jbankfin.2020.105749
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    More about this item

    Keywords

    Presidential honeymoons; Market anomalies; Political uncertainty; Risk aversion; Value premium;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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