The Presidential Puzzle: Democrats, Macroeconomic News and Equity and Bond Premiums on Announcement Days
43 Pages Posted: 13 Oct 2016 Last revised: 22 Oct 2016
Date Written: October 20, 2016
Recent empirical finance literature reports a sizable equity premium on two types of days. The first is under Democratic administrations. The second is on scheduled macroeconomic news announcement days. The current study unifies the two strands of literature by documenting that statistically significant and economically large announcement-day U.S. equity premiums have been limited to periods of Democratic administration between 1964 and 2015. On announcement days in Republican administrations, the estimated equity premium accompanying news announcements was negligible. The Democratic announcement-day equity premium was consistently positive in sub-periods; it showed up in international markets; it increased as election day approached; it appeared to be stronger for announcements in successive Democratic administrations; and it was bigger for medium and large market cap stocks than for small market caps stocks on announcement days, even though small stocks have in general beaten large stocks under Democratic presidents. At the same time, we show that FOMC announcements in the 1990-2015 sub-period were associated with positive equity premiums in both Democratic (Clinton and Obama) and Republican (G.W. Bush) administrations; and also that macroeconomic announcements impacted Treasury bond returns primarily in Republican administrations.
Keywords: Bond Premium; Equity Premium; Macroeconomic News Announcements; Political Regimes; Presidential Puzzle
JEL Classification: E44; G11; G12; P16
Suggested Citation: Suggested Citation