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Should stock market return forecasts be conditioned on politics?

Author

Listed:
  • John G Powell

    (Research School of Finance, Actuarial Studies and Applied Statistics, The Australian National University, Australia)

  • Meifen Qian

    (International Institute for Financial Studies, Jiangxi University of Finance and Economics, China)

  • Jing Shi

    (International Institute for Financial Studies, Jiangxi University of Finance and Economics, China; School of Economics, Finance and Marketing, RMIT University, Australia)

  • Qiaoqiao Zhu

    (Research School of Finance, Actuarial Studies and Applied Statistics, The Australian National University, Australia)

Abstract

This paper examines whether stock market returns forecasts should take account of the political party in power by re-examining the prior literature to demonstrate that US stock market political regime differences are neither significant nor long-lasting. We demonstrate that the presidential regime dummy variable used in prior studies is highly auto-correlated, thus potentially violating the ordinary least squares assumption of independently distributed regression errors. Simulation and bootstrap analyses are used to demonstrate that prior findings of higher returns and lower risk under Democratic presidencies are less than would be expected by chance, once account is taken of the persistence properties of the presidential regime dummy variable used in prior studies. Theoretical considerations are also used to explain why presidential regime differences are unlikely to persist, thus further reconciling the paper’s findings with prior studies.

Suggested Citation

  • John G Powell & Meifen Qian & Jing Shi & Qiaoqiao Zhu, 2015. "Should stock market return forecasts be conditioned on politics?," Australian Journal of Management, Australian School of Business, vol. 40(4), pages 672-700, November.
  • Handle: RePEc:sae:ausman:v:40:y:2015:i:4:p:672-700
    DOI: 10.1177/0312896214526213
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    References listed on IDEAS

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    1. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2007. "Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 807-829.
    2. David Leblang & Bumba Mukherjee, 2005. "Government Partisanship, Elections, and the Stock Market: Examining American and British Stock Returns, 1930–2000," American Journal of Political Science, John Wiley & Sons, vol. 49(4), pages 780-802, October.
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    5. Pedro Santa‐Clara & Rossen Valkanov, 2003. "The Presidential Puzzle: Political Cycles and the Stock Market," Journal of Finance, American Finance Association, vol. 58(5), pages 1841-1872, October.
    6. Whitney Newey & Kenneth West, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    7. Knight*, Brian, 2007. "Are policy platforms capitalized into equity prices? Evidence from the Bush/Gore 2000 Presidential Election," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 389-409, February.
    8. Schwert, G William, 1990. "Indexes of U.S. Stock Prices from 1802 to 1987," The Journal of Business, University of Chicago Press, vol. 63(3), pages 399-426, July.
    9. Knight*, Brian, 2007. "Are policy platforms capitalized into equity prices? Evidence from the Bush/Gore 2000 Presidential Election," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 389-409, February.
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    12. repec:bla:jfinan:v:58:y:2003:i:4:p:1393-1414 is not listed on IDEAS
    13. Powell, John G. & Shi, Jing & Smith, Tom & Whaley, Robert E., 2009. "Political regimes, business cycles, seasonalities, and returns," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1112-1128, June.
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    Cited by:

    1. Kam Fong Chan & John G. Powell & Jing Shi & Tom Smith, 2018. "Dividend persistence and dividend behaviour," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(1), pages 127-147, March.

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