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Aggregate congressional trading and stock market returns

Author

Listed:
  • Serkan Karadas
  • Minh Tam Tammy Schlosky
  • Joshua C. Hall

Abstract

Purpose - What information do members of Congress (politicians) use when they trade stocks? The purpose of this paper is to attempt to answer this question by investigating the relationship between an aggregate measure of trading by members of Congress (aggregate congressional trading) and future stock market returns. Design/methodology/approach - The authors follow the empirical framework used in academic work on corporate insiders. In particular, they aggregate 61,998 common stock transactions by politicians over the 2004–2010 period and estimate time series regressions at a monthly frequency with heteroskedasticity and autocorrelation robustt-statistics. Findings - The authors find that aggregate congressional trading predicts future stock market returns, suggesting that politicians use economy-wide (i.e. macroeconomic) information in their stock trades. The authors also present evidence that aggregate congressional trading is related to the growth rate of industrial production, suggesting that industrial production serves as a potential channel through which aggregate congressional trading predicts future stock market returns. Originality/value - To the best of the authors’ knowledge, this study is the first to document a relationship between aggregate congressional trading and stock market returns. The media and scholarly attention on politicians’ trades have mostly focused on the question of whether politicians have superior information on individual firms. The results from this study suggest that politicians’ informational advantage may go beyond individual firms such that they potentially have superior information on the overall trajectory of the economy as well.

Suggested Citation

  • Serkan Karadas & Minh Tam Tammy Schlosky & Joshua C. Hall, 2021. "Aggregate congressional trading and stock market returns," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 14(2), pages 172-186, June.
  • Handle: RePEc:eme:jfeppp:jfep-02-2021-0035
    DOI: 10.1108/JFEP-02-2021-0035
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    More about this item

    Keywords

    Congress; Return predictability; STOCK Act; Insider trading; Informed trading; Financial Markets and the macroeconomy; Political economy; Government policy and regulation; Public economics; Structure and scope of government; Legislatures; G12; G14; G18;
    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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