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The Presidential Puzzle: Political Cycles and the Stock Market

Pedro Santa-Clara and Rossen Valkanov
The Journal of Finance
Vol. 58, No. 5 (Oct., 2003), pp. 1841-1872
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/3648176
Page Count: 32
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The Presidential Puzzle: Political Cycles and the Stock Market
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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 sub-samples. 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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