Congress and the Stock Market
Michael F. Ferguson
University of Cincinnati - Department of Finance - Real Estate
Hugh Douglas Witte
University of Missouri at Columbia - Department of Finance
March 13, 2006
We find a strong link between Congressional activity and stock market returns that persists even after controlling for known daily return anomalies. Stock returns are lower and volatility is higher when Congress is in session. This "Congressional Effect" can be quite large - more than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session. The Effect varies systematically with the public's opinion of Congress: returns are lower and volatility higher when a relatively unpopular Congress is active. Public opinion appears to play a fundamental role in market prices. This is consistent with a mood-based explanation that sees Congress as 'depressing' the average investor. Alternatively, our results can also be reconciled with rational explanations that view Congressional activity as a proxy for regulatory uncertainty or rent-seeking behavior.
Number of Pages in PDF File: 39
Keywords: stock market, Congress, anomalies, behavioral finance
JEL Classification: G1, G10, G14, G18
Date posted: March 21, 2005
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