The Midterm Election Effect on Us Stock Returns: Some Practical Considerations for Investors

30 Pages Posted: 28 Sep 2022 Last revised: 20 Oct 2022

See all articles by Warwick W. Anderson

Warwick W. Anderson

University of Canterbury

Jedrzej Pawel Bialkowski

University of Canterbury - Department of Economics and Finance

Moritz Wagner

University of Canterbury

Date Written: October 19, 2022

Abstract

The midterm election effect is one of the most persistent regularities related to US politics reported in empirical finance, but it has also been one of the least examined. We explore practical implications for investors who would like to benefit from the effect. First, we draw lessons from an analysis of 49 industry portfolios, using monthly excess and risk-adjusted returns for the period 1926-2022. Contrary to much commentary in the professional media and prior literature, higher returns around midterm elections all but disappear after returns are adjusted for risk. Second, we find that midterm elections are predominantly associated with the market factor and thus, higher returns appear to merely compensate investors for bearing risk.

Keywords: Midterm election, Midterm election effect, Political uncertainty, Fama-French 5 factors model

JEL Classification: G11, G12, G14, P48

Suggested Citation

Anderson, Warwick W. and Bialkowski, Jedrzej Pawel and Wagner, Moritz, The Midterm Election Effect on Us Stock Returns: Some Practical Considerations for Investors (October 19, 2022). Available at SSRN: https://ssrn.com/abstract=4220475 or http://dx.doi.org/10.2139/ssrn.4220475

Warwick W. Anderson

University of Canterbury ( email )

Private Bag 4800
Christchurch
New Zealand

Jedrzej Pawel Bialkowski (Contact Author)

University of Canterbury - Department of Economics and Finance ( email )

Private Bag 4800
Christchurch, 8140
New Zealand

Moritz Wagner

University of Canterbury ( email )

Ilam Road
Christchurch 8140
New Zealand

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