Should Stock Market Return Forecasts Be Conditioned on Politics?

Posted: 15 Jan 2016

See all articles by John Powell

John Powell

Independent

Meifen Qian

Jiangxi University of Finance and Economics

Jing Shi

Macquarie UNiversity

Qiaoqiao Zhu

Australian National University (ANU) - College of Business and Economics; Financial Research Network (FIRN)

Date Written: November 1, 2015

Abstract

This paper examines whether stock market returns forecasts should take account of the political party in power by re-examining the prior literature to demonstrate that US stock market political regime differences are neither significant nor long-lasting. We demonstrate that the presidential regime dummy variable used in prior studies is highly auto-correlated, thus potentially violating the ordinary least squares assumption of independently distributed regression errors. Simulation and bootstrap analyses are used to demonstrate that prior findings of higher returns and lower risk under Democratic presidencies are less than would be expected by chance, once account is taken of the persistence properties of the presidential regime dummy variable used in prior studies. Theoretical considerations are also used to explain why presidential regime differences are unlikely to persist, thus further reconciling the paper’s findings with prior studies.

Keywords: Auto-correlated explanatory variables, presidential regimes, spurious regression, stock market return differences

Suggested Citation

Powell, John and Qian, Meifen and Shi, Jing and Zhu, Qiaoqiao, Should Stock Market Return Forecasts Be Conditioned on Politics? (November 1, 2015). Australian Journal of Management, Vol. 40, No. 4, 2015. Available at SSRN: https://ssrn.com/abstract=2715435

John Powell (Contact Author)

Independent ( email )

No Address Available

Meifen Qian

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Jing Shi

Macquarie UNiversity ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/jing-shi

Qiaoqiao Zhu

Australian National University (ANU) - College of Business and Economics ( email )

Canberra, Australian Capital Territory 2601
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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