The Presidential Puzzle: Political Cycles and the Stock Market

Authors

  • Pedro Santa-Clara,

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    • Santa-Clara and Valkanov are from The Anderson School, University of California, Los Angeles. We thank Antonio Bernardo, Michael Brandt, Michael Brennan, Bhagwan Chowdhry, Brad Cornell, Eugene Fama, Shingo Goto, Mark Grinblatt, Harrison Hong, Jun Liu, Francis Longstaff, Monika Piazzesi, Richard Roll, and José Tavares for useful comments. We are especially grateful to Maria Gonzalez, Richard Green (the editor), and an anonymous referee for many suggestions that have greatly improved this paper. We thank Kenneth French and G. William Schwert for providing financial data. All remaining errors are our own.
  • Rossen Valkanov

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    • Santa-Clara and Valkanov are from The Anderson School, University of California, Los Angeles. We thank Antonio Bernardo, Michael Brandt, Michael Brennan, Bhagwan Chowdhry, Brad Cornell, Eugene Fama, Shingo Goto, Mark Grinblatt, Harrison Hong, Jun Liu, Francis Longstaff, Monika Piazzesi, Richard Roll, and José Tavares for useful comments. We are especially grateful to Maria Gonzalez, Richard Green (the editor), and an anonymous referee for many suggestions that have greatly improved this paper. We thank Kenneth French and G. William Schwert for providing financial data. All remaining errors are our own.

Abstract

The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The difference comes from higher real stock returns and lower real interest rates, is statistically significant, and is robust in subsamples. The difference in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no difference in the riskiness of the stock market across presidencies that could justify a risk premium. The difference in returns through the political cycle is therefore a puzzle.

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