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Government Partisanship, Elections, and the Stock Market: Examining American and British Stock Returns, 1930–2000

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  • David Leblang
  • Bumba Mukherjee

Abstract

We construct a model of speculative trading to examine how the mean and volatility of stock prices is affected both by government partisanship and by traders' expectations of electoral victory by the right‐wing or left‐wing party. Our model predicts that rational expectations of higher inflation under left‐wing administrations lowers the volume of stocks traded in the stock market. The decline in trading volume leads to a decrease in the mean and volatility of stock prices not only during the incumbency of left‐wing governments, but also when traders expect the left‐wing party to win elections. Conversely, expectation of lower inflation under right‐wing administrations leads to higher trading volume. This leads to an increase in the mean and volatility of stock prices during the tenure of right‐wing governments and when traders anticipate the right‐wing party to win elections. Daily and monthly data from U.S. and British equity markets between 1930 and 2000 statistically corroborate the predictions from our formal model.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:amposc:v:49:y:2005:i:4:p:780-802
    DOI: 10.1111/j.1540-5907.2005.00155.x
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    1. Alberto Alesina & Nouriel Roubini & Gerald D. Cohen, 1997. "Political Cycles and the Macroeconomy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510944, December.
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