46 Pages Posted: 27 Sep 2019 Last revised: 8 Oct 2019
Date Written: September 26, 2019
We show that stock prices underreact when there is a political event, reflected in higher momentum returns. We conjecture that political news crowds out stock news cause investors to distract, trade more indexes and underreact to firm specific news. We analyze momentum returns following general election day, and find 8.8% increase in momentum portfolio return. Our channel to identify higher momentum after elections encompasses both rational and behavioral parts. The rational part is due to political uncertainty around elections, and the behavioral part is due to investors’ distraction. Using Google trend data, we posit that investors change their news priorities to focus more on political news, and so some stock news slips under the radar. In sum, momentum strategies outperform during election cycles because investors’ distraction to stock market news.
Keywords: momentum, political uncertainty, distraction, behavioral finance, media news priorities
JEL Classification: G10, G12
Suggested Citation: Suggested Citation