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Political Cycles and Stock Returns

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  • P�stor, Lubo�
  • Veronesi, Pietro

Abstract

We develop a model of political cycles driven by time-varying risk aversion. Heterogeneous agents make two choices: whether to work in the public or private sector and which of two political parties to vote for. The model implies that when risk aversion is high, agents are more likely to elect the party promising more fiscal redistribution. The model predicts higher average stock market returns under Democratic than Republican presidencies, explaining the well-known ``presidential puzzle." Under sufficient complementarity between the public and private sectors, the model also predicts faster economic growth under Democratic presidencies, which is observed in the data.

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  • P�stor, Lubo� & Veronesi, Pietro, 2017. "Political Cycles and Stock Returns," CEPR Discussion Papers 11864, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11864
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    1. Chris Sampson’s journal round-up for 7th December 2020
      by Chris Sampson in The Academic Health Economists' Blog on 2020-12-07 12:00:03

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    9. Ray C. Fair, 2021. "Are Stock Returns and Output Growth Higher Under Democrats?," Cowles Foundation Discussion Papers 2277, Cowles Foundation for Research in Economics, Yale University.
    10. Rangan Gupta & Mark E. Wohar, 2019. "Presidential Cycles In The Usa And The Dollar-Pound Exchange Rate: Evidence From Over Two Centuries," Advances in Decision Sciences, Asia University, Taiwan, vol. 23(2), pages 151-163, June.
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    12. Dorine Boumans & Klaus Gründler & Niklas Potrafke & Fabian Ruthardt & Fabian Ruthardt, 2021. "The Global Economic Impact of Politicians: Evidence from an International Survey RCT," EconPol Working Paper 56, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    13. Dodge Cahan & Niklas Potrafke, 2017. "The Democratic-Republican Presidential Growth Gap and the Partisan Balance of the State Governments," CESifo Working Paper Series 6517, CESifo.
    14. Demirer, Riza & Gupta, Rangan, 2018. "Presidential cycles and time-varying bond–stock market correlations: Evidence from more than two centuries of data," Economics Letters, Elsevier, vol. 167(C), pages 36-39.
    15. Alhashel, Bader S., 2020. "Hail to the chief: The effect of political alignment with the presidency on corporate investment," Research in International Business and Finance, Elsevier, vol. 54(C).
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    17. de Oliveira, Felipe A. & Maia, Sinézio F. & de Jesus, Diego P. & Besarria, Cássio da N., 2018. "Which information matters to market risk spreading in Brazil? Volatility transmission modelling using MGARCH-BEKK, DCC, t-Copulas," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 83-100.
    18. Maya Jalloul & Mirela Miescu, 2021. "Equity Market Connectedness across Regimes of Geopolitical Risks," Working Papers 324219805, Lancaster University Management School, Economics Department.
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    21. Travis L Johnson, 2019. "A Fresh Look at Return Predictability Using a More Efficient Estimator," Review of Asset Pricing Studies, Oxford University Press, vol. 9(1), pages 1-46.
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    23. de Oliveira Souza, Thiago, 2018. "Red tape asset pricing," Discussion Papers of Business and Economics 8/2018, University of Southern Denmark, Department of Business and Economics.
    24. Rangan Gupta & Mark E. Wohar, 2018. "Presidential Cycles in the United States and the Dollar-Pound Exchange Rate: Evidence from over Two Centuries of Data," Working Papers 201874, University of Pretoria, Department of Economics.
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    More about this item

    Keywords

    political cycles; presidential puzzle; risk aversion;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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