Political Cycles and the Stock Market

Anderson School of Management, UCLA, Working Paper

56 Pages Posted: 25 Oct 2000

See all articles by Pedro Santa-Clara

Pedro Santa-Clara

Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Rossen I. Valkanov

University of California, San Diego (UCSD) - Rady School of Management

Date Written: October 2000

Abstract

Contrary to the widespread opinion that "Republicans are good for business," we find that the average excess returns in the stock market are higher under Democratic presidents. The empirical difference between Republican and Democratic mandates, which is about 9% annually for the value-weighted portfolio and 16% for the equally-weighted portfolio, is economically and statistically significant, and is also robust in subsamples. Moreover, there is a remarkable monotonicity in the difference of returns for size-decile portfolios, from \% for large firms to about 20% for small firms. We test three plausible explanations of the above findings. First, we test the hypothesis that the observed correlation is entirely due to political variables proxying for business-cycle factors. Second, we explore whether the observed relation can be explained by "election shocks," i.e whether the effect is concentrated around the election dates, when new information is revealed. Lastly, we investigate the possibility that varying volatity and price of risk during the two presidential regimes might account for our findings. We reject all three hypotheses. As it stands, the difference in excess returns during Republican and Democratic presidencies is a puzzling feature of the data that cannot easily be accommodated by asset pricing models.

Suggested Citation

Santa-Clara, Pedro and Valkanov, Rossen, Political Cycles and the Stock Market (October 2000). Anderson School of Management, UCLA, Working Paper, Available at SSRN: https://ssrn.com/abstract=244728 or http://dx.doi.org/10.2139/ssrn.244728

Pedro Santa-Clara

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~psc/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Rossen Valkanov (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858-534-0898 (Phone)