PRESIDENTIAL ELECTION UNCERTAINTY AND COMMON STOCK RETURNS IN THE UNITED STATES

Authors


  • The authors wish to thank William T. Moore (the former editor) and Pedro Santa-Clara (the referee) for very helpful comments. Helpful discussions with Paul Bolster, Sangit Chatterjee, Bob Mooradian, Emery Trahan, and Shiawee Yang are also appreciated.

Abstract

There is substantial evidence on the influence of political outcomes on the business cycle and stock market. We further hypothesize that uncertainty about the outcome of a U.S. presidential election should be reflected in pre-election common stock returns. Prior research pools returns based on the party of the winning candidate, assuming that the outcome of the election is known a priori. We use candidate preference (i.e., polling) data to construct a measure of election uncertainty. We find that if the election does not have a candidate with a dominant lead, stock market volatility (risk) and average returns rise.

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