Under-Reaction to Political Information and Price Momentum

51 Pages Posted: 17 Apr 2014 Last revised: 15 Jun 2018

See all articles by Jawad M. Addoum

Jawad M. Addoum

Cornell SC Johnson College of Business

Stefanos Delikouras

University of Miami - Department of Finance

Da Ke

University of South Carolina - Department of Finance

Alok Kumar

University of Miami - Miami Herbert Business School

Date Written: June 6, 2018

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 6, 2018). University of Miami Legal Studies Research Paper No. 18-4, Available at SSRN: https://ssrn.com/abstract=2425204 or http://dx.doi.org/10.2139/ssrn.2425204

Jawad M. Addoum

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Stefanos Delikouras

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Da Ke

University of South Carolina - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

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

Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

517B Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://sites.google.com/view/alokmiami/home

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