Can Political Factors Explain the Behavior of Stock Prices Beyond the Standard Present Value Models?

Abstract

This paper documents that political factors can be linked to the part of stock prices that cannot be explained by the standard present value models. The non-fundamental component of stock market index appears to be significantly influenced by the political orientation of the president and his approval rating, election cycle and military conflicts. The findings presented here indicate that there is much more to the price formation process than the present value of future dividends.

Keywords: Present Value Models, Politics, Asset Pricing

JEL Classification: G12, G14, E60