Journal of Political Economy Vol. 128 No. 11 2020
Political Cycles and Stock Returns
Abstract
We develop a model of political cycles driven by time-varying risk aversion. Agents choose to work in the public or private sector and to vote Democrat or Republican. In equilibrium, when risk aversion is high, agents elect Democrats-the party promising more redistribution. The model predicts higher average stock market returns under Democratic presidencies, explaining the well-known "presidential puzzle." The model can also explain why economic growth has been faster under Democratic presidencies. In the data, Democratic voters are more risk-averse and risk aversion declines during Democratic presidencies. Public workers vote Democrat while entrepreneurs vote Republican, as the model predicts.
- DOI
- 10.1086/710532
- Volume
- 128
- Issue
- 11
- Pages
- 4011-4045
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex