The Impact of Political Variables on Stock Returns and Investor Sentiment

Abstract

In this paper, we employ econometric techniques to examine the impact of political variables on investor sentiment, stock market returns, and the covariance between investor sentiment and equity returns. Similar to prior studies our results indicate that stock market returns are higher during Democratic presidencies. Contrast we also find that both investor sentiment and the covariance between investor sentiment and stock returns are both higher when Democrats control the White House. Our results seem to suggest that political variables not only influence stock returns, but they also influence the way investors feel about the market.

Keywords: investor sentiment, stock market returns, equity return, political variables

JEL Classification: M1,G02