From Uncertainty to Stability: How Presidential Seniority Shapes Markets

Abstract

We show that presidential seniority, measured in months in office, significantly influences stock market returns and volatility. Our hypothesis posits that policy uncertainty is highest when a new president takes office, leading to increased household risk aversion, lower stock returns, and heightened volatility. As a president’s tenure progresses, uncertainty declines, investor risk tolerance rises, stock returns improve, and volatility decreases. However, in democratic regimes with term limits, uncertainty resurfaces toward the end of a second term, disrupting this trend and restarting the cycle. Consequently, stock returns follow a concave pattern, while volatility exhibits a convex trajectory over a president’s tenure. These effects vary across market downturns and industry sectors. Our findings establish presidential seniority as a key exogenous factor shaping stock market dynamics throughout the electoral cycle, offering new insights into time-series variations in returns and volatility with important implications for investors and policymakers.

Keywords: Presidential Seniority, Stock Market Outcomes, Risk Aversion, Excess Returns, Market Volatility, Economic Policy Uncertainty, Regulatory Uncertainty, Nonlinear Relationships, Electoral Cycle, Political Economy

JEL Classification: G12, G40, D72, G14