Presidential Cycles and Time-Varying Bond-Stock Market Correlations: Evidence from More than Two Centuries of Data

11 Pages Posted: 15 Mar 2018 Last revised: 23 Sep 2018

See all articles by Riza Demirer

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Rangan Gupta

University of Pretoria - Department of Economics

Date Written: March 12, 2018

Abstract

This paper examines the effect of presidential cycles on financial market correlations using monthly data for the U.S. stock and government bond returns over the historical period of 1791:09-2017:12. Utilizing a dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (DCC-GARCH) model to capture the time-varying correlations, we show that Democratic administrations are generally associated with lower degree of co-movement between the stock and government bond returns. The observed negative presidential cycle effect is robust over various sub-samples identified by structural break tests. The findings are in line with the documented presidential cycle effect on stock market returns and corroborate recent evidence that, when risk aversion is high, agents tend to elect the Democratic Party.

Keywords: Conditional correlation, GARCH, Bond and Stock Returns Comovement, US Presidential Cycles

JEL Classification: C22, C32, D72, G10, G12

Suggested Citation

Demirer, Riza and Gupta, Rangan, Presidential Cycles and Time-Varying Bond-Stock Market Correlations: Evidence from More than Two Centuries of Data (March 12, 2018). Economics Letters 167, 36-39, 2018., Available at SSRN: https://ssrn.com/abstract=3138957

Riza Demirer (Contact Author)

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3144
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF)

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(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

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