Political Sentiment and Predictable Returns
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. Received November 15, 2013; accepted April 5, 2016 by Editor Andrew Karolyi.
- DOI
- 10.1093/rfs/hhw066
- Volume
- 29 (12)
- Pages
- 3471-3518
- Language
- en
- Export
- BibTeX
- Sources
- crossref openalex