Divided Government and Stock Returns

30 Pages Posted: 7 Dec 2022

See all articles by Mungo Ivor Wilson

Mungo Ivor Wilson

University of Oxford - Said Business School

Theofanis Papamichalis

University of Cambridge

Date Written: November 27, 2022


We document that unified US governments (i.e. where the same party controls both the Presidency and both houses of Congress) are associated with higher annual excess and real stock returns than divided US governments, controlling for the party of the President. For the value-weighted portfolio the difference is 9.95% and for the equal-weighted 18.37%. These results are statistically and economically significant, robust in subsamples and robust to a Democrat president (see Santa-Clara and Valkanov (2003)). Differences in volatility fail to explain these differences in average returns, as they go in the opposite direction. Similar results are obtained for real GDP growth rates (see also Blinder and Watson (2016)). In particular, average annual real GDP growth rates for unified and divided governments are 3.70% and 2.34% respectively per year. Analysis of close elections as quasi-random assignments of either Democrat Presidencies or Unified governments implies a strong and statistically significant causal role for Unified governments on GDP growth, 8.19% higher, and a massive 54.7% excess stock market return.

Keywords: Unified Government, Presidential Puzzle, Stock Returns, Growth.

JEL Classification: D72, E02, E32, E65, N12, N42

Suggested Citation

Wilson, Mungo Ivor and Papamichalis, Theofanis, Divided Government and Stock Returns (November 27, 2022). Available at SSRN: https://ssrn.com/abstract=4287033 or http://dx.doi.org/10.2139/ssrn.4287033

Mungo Ivor Wilson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288914 (Phone)

Theofanis Papamichalis (Contact Author)

University of Cambridge ( email )

Austin Robinson Building
Sidgwick Ave
Cambridge, Cambridgeshire CB3 9DD
United Kingdom

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