Politics and Liquidity
28 Pages Posted: 18 Nov 2016 Last revised: 29 May 2018
Date Written: November 16, 2016
The equity market is more liquid under Democratic than Republican presidencies. This is apparent at the market level but is stronger in small, value stocks and in industries that are more sensitive to Democratic presidents. The effect is robust to different liquidity measures and time periods. It holds after controlling for the business cycle, macroeconomic variables, and the party with House of Representatives and Senate majorities. There is evidence that the liquidity effect is driven by a number of channels. Information asymmetry, volatility, and economic policy uncertainty are all lower during Democratic presidencies.
Keywords: Liquidity, Politics, Information Asymmetry, Economic Policy Uncertainty
JEL Classification: G11, G14
Suggested Citation: Suggested Citation