Political Climate, Optimism, and Investment Decisions

40 Pages Posted: 21 Nov 2009 Last revised: 20 Apr 2012

Yosef Bonaparte

University of Colorado at Denver - Department of Finance

Alok Kumar

University of Miami - School of Business Administration

Jeremy K. Page

Brigham Young University

Date Written: February 26, 2012

Abstract

We show that people's optimism towards financial markets and the macroeconomy is dynamically influenced by their political affiliation and the existing political climate. Individuals become more optimistic and perceive the markets to be less risky and more undervalued when their own party is in power. These shifts in perceptions of risk and reward affect investors' portfolio decisions. Specifically, when the political climate is aligned with their political identity, investors increase allocations to risky assets and exhibit a stronger preference for high market beta, small-cap, and value stocks. Due to these portfolio reallocations, investors improve their raw portfolio performance when their own party is in power, but the improvement in risk-adjusted performance is economically small.

Suggested Citation

Bonaparte, Yosef and Kumar, Alok and Page, Jeremy K., Political Climate, Optimism, and Investment Decisions (February 26, 2012). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1509168 or http://dx.doi.org/10.2139/ssrn.1509168

Yosef Bonaparte

University of Colorado at Denver - Department of Finance ( email )

United States

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Jeremy K. Page

Brigham Young University ( email )

Marriott School of Management
685 TNRB
Provo, UT 84602
United States
801-422-7173 (Phone)

HOME PAGE: http://marriottschool.byu.edu/directory/details?id=19364

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