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Political Cycles and Stock Returns

Author

Listed:
  • Lubos Pastor
  • Pietro Veronesi

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.

Suggested Citation

  • Lubos Pastor & Pietro Veronesi, 2017. "Political Cycles and Stock Returns," NBER Working Papers 23184, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23184
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    References listed on IDEAS

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    1. repec:eee:ecolet:v:167:y:2018:i:c:p:36-39 is not listed on IDEAS
    2. repec:kap:pubcho:v:174:y:2018:i:1:d:10.1007_s11127-017-0491-3 is not listed on IDEAS
    3. Niklas Potrafke, 2017. "Government Ideology and Economic Policy-Making in the United States," CESifo Working Paper Series 6444, CESifo Group Munich.
    4. 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 Group Munich.

    More about this item

    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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