Partisan Politics, Interest Rates and the Stock Market: Evidence from American and British Returns in the Twentieth Century

33 Pages Posted: 26 Jun 2007

See all articles by Bumba Mukherjee

Bumba Mukherjee

University of Notre Dame - Kellogg Institute for International Studies; Princeton University

David A. Leblang

University of Virginia; University of Virginia - College of Arts and Sciences; University of Virginia - Woodrow Wilson Department of Politics; University of Virginia - Frank Batten School of Leadership and Public Policy

Abstract

We examine the relationship between government partisanship, interest rates and the mean and volatility of stock prices in the United States and United Kingdom. We suggest that traders in the stock market rationally expect higher (lower) post-electoral interest rates during the incumbency of the left-wing (right-wing) party - Democrats and Labor (Republican and Conservative) - and in election years when they expect the left-wing (right-wing) party to win elections. We hypothesize that expectations of higher (lower) interest rates decrease (increase) the mean and volatility of stock prices during the actual incumbency or even anticipation of a left-wing (right-wing) party holding the office of the chief executive. Results from empirical models estimated on data from U.S. and U.K. markets over most of the twentieth century statistically support our claims.

Suggested Citation

Mukherjee, Bumba and Leblang, David A., Partisan Politics, Interest Rates and the Stock Market: Evidence from American and British Returns in the Twentieth Century. Economics & Politics, Vol. 19, No. 2, pp. 135-167, July 2007, Available at SSRN: https://ssrn.com/abstract=995305 or http://dx.doi.org/10.1111/j.1468-0343.2007.00306.x

Bumba Mukherjee

University of Notre Dame - Kellogg Institute for International Studies ( email )

130 Hesburgh Center
Notre Dame, IN 46556
United States
(574) 631-7472 (Phone)

HOME PAGE: http:/politicalscience.nd.edu/faculty

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

David A. Leblang (Contact Author)

University of Virginia ( email )

PO Box 400787
University of Virginia
Charlottesville, VA 22904
United States

University of Virginia - College of Arts and Sciences ( email )

VA
United States

University of Virginia - Woodrow Wilson Department of Politics ( email )

PO Box 400787
University of Virginia
Charlottesville, VA 22904
United States

University of Virginia - Frank Batten School of Leadership and Public Policy ( email )

235 McCormick Rd.
P.O. Box 400893
Charlottesville, VA 22904-4893
United States

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