Review of Financial Studies Vol. 29 No. 12 2016
Political Sentiment and Predictable Returns
Abstract
This study shows that shifts in political climate influence stock prices. As the party in power changes, there are systematic changes in the industry-level composition of investor portfolios, which weaken arbitrage forces and generate predictable patterns in industry returns. A trading strategy that attempts to exploit demand-based return predictability generates an annualized risk-adjusted performance of 6% during the 1939 to 2011 period. This evidence of predictability spans 17%–27% of the market and is stronger during periods of political transition. Our demand-based predictability pattern is distinct from cash flow-based predictability identified in the recent literature.
- Volume
- 29
- Issue
- 12
- Pages
- 3471-3518
- Sources
- bibtex:phds-export.bib