Washington meets Wall Street: a closer examination of the presidential cycle puzzle

  • We show that average excess returns during the last two years of the presidential cycle are significantly higher than during the first two years: 9.8 percent over the period 1948 – 2008. This pattern in returns cannot be explained by business-cycle variables capturing time-varying risk premia, differences in risk levels, or by consumer and investor sentiment. In this paper, we formally test the presidential election cycle (PEC) hypothesis as the alternative explanation found in the literature for explaining the presidential cycle anomaly. PEC states that incumbent parties and presidents have an incentive to manipulate the economy (via budget expansions and taxes) to remain in power. We formulate eight empirically testable propositions relating to the fiscal, monetary, tax, unexpected inflation and political implications of the PEC hypothesis. We do not find statistically significant evidence confirming the PEC hypothesis as a plausible explanation for the presidential cycle effect. The existence of the presidential cycle effect in U.S. financial markets thus remains a puzzle that cannot be easily explained by politicians employing their economic influence to remain in power. JEL Classification: E32; G14; P16 Keywords: Political Economy, Market Efficiency, Anomalies, Calendar Effects

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Author:Roman KräusslORCiDGND, André Lucas, David R. Rijsbergen, Pieter Jelle van der Sluis, Evert B. Vrugt
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2010,06
Series (Serial Number):CFS working paper series (2010, 06)
Document Type:Working Paper
Year of Completion:2010
Year of first Publication:2010
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2010/03/22
Tag:anomalies; calendar effects; market efficiency; political economy
GND Keyword:USA; Kreditmarkt; Finanzwirtschaft; USA / President; Amtsperiode; Geschichte 1948-2008
Issue:This version: January 2010
Page Number:33
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht