Political Sentiment and Predictable Returns

72 Pages Posted: 2 Nov 2012 Last revised: 1 Mar 2016

See all articles by Jawad M. Addoum

Jawad M. Addoum

Cornell University

Alok Kumar

University of Miami - School of Business Administration

Date Written: February 29, 2016

Abstract

This study shows that shifts in political climate influence stock prices. As the party in power changes, there are systematic changes in the industry-level composition of investor portfolios, which weaken arbitrage forces and generate predictable patterns in industry returns. A trading strategy that attempts to exploit demand-based return predictability generates an annualized risk-adjusted performance of six percent during the 1939 to 2011 period. This evidence of predictability spans 17-27% of the market and is stronger during periods of political transition. Our demand-based predictability pattern is distinct from cash-flow based predictability identified in the recent literature.

Suggested Citation

Addoum, Jawad M. and Kumar, Alok, Political Sentiment and Predictable Returns (February 29, 2016). Available at SSRN: https://ssrn.com/abstract=2169360 or http://dx.doi.org/10.2139/ssrn.2169360

Jawad M. Addoum (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Alok Kumar

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

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