Washington Meets Wall Street: A Closer Examination of the Presidential Cycle Puzzle

31 Pages Posted: 27 Oct 2008 Last revised: 14 Apr 2014

See all articles by Roman Kräussl

Roman Kräussl

Universite du Luxembourg - Department of Finance; Hoover Institution, Stanford University

Andre Lucas

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute

David R. Rijsbergen

De Nederlandsche Bank

Pieter Jelle van der Sluis

affiliation not provided to SSRN

Evert B. Vrugt

VU University Amsterdam, PGO-IM

Date Written: March 1, 2009

Abstract

We show that average excess returns during the last two years of the presidential cycle are significantly higher than during the first two years: 9.8 percent over the period 1948-2008. This pattern in returns cannot be explained by business-cycle variables capturing time-varying risk premia, differences in risk levels, or by consumer and investor sentiment. In this paper, we formally test the presidential election cycle (PEC) hypothesis as the alternative explanation found in the literature for explaining the presidential cycle anomaly. PEC states that incumbent parties and presidents have an incentive to manipulate the economy (via budget expansions and taxes) to remain in power. We formulate eight empirically testable propositions relating to the fiscal, monetary, tax, unexpected inflation and political implications of the PEC hypothesis. We do not find statistically significant evidence confirming the PEC hypothesis as a plausible explanation for the presidential cycle effect. The existence of the presidential cycle effect in U.S. financial markets thus remains a puzzle that cannot be easily explained by politicians employing their economic influence to remain in power.

Keywords: political economy, inefficient markets, market anomalies, calendar effects

JEL Classification: G14, P16, E32

Suggested Citation

Kraeussl, Roman and Lucas, Andre and Rijsbergen, David R. and van der Sluis, Pieter Jelle and Vrugt, Evert B., Washington Meets Wall Street: A Closer Examination of the Presidential Cycle Puzzle (March 1, 2009). Journal of International Money and Finance, Vol. 43, 2014, Available at SSRN: https://ssrn.com/abstract=1288615 or http://dx.doi.org/10.2139/ssrn.1288615

Roman Kraeussl (Contact Author)

Universite du Luxembourg - Department of Finance ( email )

L-1511 Luxembourg
Luxembourg

Hoover Institution, Stanford University ( email )

Stanford, CA 94305
United States

Andre Lucas

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

David R. Rijsbergen

De Nederlandsche Bank ( email )

Westeinde 1
Amsterdam, 1017 ZN
Netherlands

Pieter Jelle Van der Sluis

affiliation not provided to SSRN

Evert B. Vrugt

VU University Amsterdam, PGO-IM ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

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