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Under-Reaction to Political Information and Price Momentum

55 Pages Posted: 17 Apr 2014 Last revised: 14 Jun 2017

Jawad M. Addoum

Cornell University

Stefanos Delikouras

University of Miami

Da Ke

University of South Carolina

Alok Kumar

University of Miami - School of Business Administration

Date Written: June 13, 2017

Abstract

This study examines whether momentum in stock prices is induced by changes in the political environment. We find that momentum profits are concentrated among politically sensitive firms and industries. During the 1939 to 2016 period, a trading strategy with a long position in winner portfolios (industries or firms) that are politically unfavored and a short position in losers that are politically favored eliminates all momentum profits. Further, our political sensitivity based factor (POL) explains 23-27% (42-43%) of monthly stock (industry) momentum alphas, and generates large increases in time-series R-squared for the momentum factor. This incremental explanatory power is especially strong around presidential elections, when the level of political activity is high. Collectively, our results suggest that investor underreaction to political information generates momentum in stock and industry returns.

Keywords: Price momentum, political climate, market underreaction, trading strategies

JEL Classification: G12, G14

Suggested Citation

Addoum, Jawad M. and Delikouras, Stefanos and Ke, Da and Kumar, Alok, Under-Reaction to Political Information and Price Momentum (June 13, 2017). Available at SSRN: https://ssrn.com/abstract=2425204 or http://dx.doi.org/10.2139/ssrn.2425204

Jawad Addoum

Cornell University ( email )

Ithaca, NY 14853
United States

Stefanos Delikouras

University of Miami ( email )

Coral Gables, FL 33124
United States

Da Ke

University of South Carolina ( email )

1014 Greene Street
Columbia, SC 29208
United States
(803) 576-5701 (Phone)

HOME PAGE: http://www.dakefinance.com

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

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