The Presidential Life Cycle and the Stock Market

Abstract

Political science theories suggest that U.S. presidents' tenures in office share distinct phases, which have systematic characteristics, that span party ideologies. However, limited attention has been paid to the relation between the presidential life cycle and financial markets. We document that excess equity returns concavely relate with presidential seniority while volatility displays a convex relation. The nonlinear comovement cannot be explained by economic policy uncertainty, but is linked to time variation in risk appetite and investor sentiment throughout presidents' tenures. Overall, the evidence implies that theories of asset prices and investor behavior may benefit from incorporating aspects of political science.

Keywords: Political finance, Political cycle, Behavioral finance

JEL Classification: G12, G40