Washington Meets Wall Street: A Closer Examination of the Presidential Cycle Puzzle

R.G.W. Kraeussl, A. Lucas, D.R. Rijsbergen, P.J. van der Sluis, E.B. Vrugt

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We show that the annual excess return of the S&P 500 is almost 10 percent higher during the last two years of the presidential cycle than during the first two years. This pattern cannot be explained by business-cycle variables capturing time-varying risk premia, differences in risk levels, or by consumer and investor sentiment. We formally test the presidential election cycle (PEC) hypothesis as an alternative to explain the presidential cycle anomaly. The 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 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 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, as is often believed. © 2013 Elsevier Ltd.
Original languageEnglish
Pages (from-to)50-69
JournalJournal of International Money and Finance
Volume43
Issue numberMay
DOIs
Publication statusPublished - 2014

Fingerprint

Presidential elections
Excess returns
Incentives
Incumbents
Financial markets
Politicians
Anomaly
Investor sentiment
Risk premia
Tax
Consumer sentiment
Time-varying risk
Fiscal
Economics
Inflation tax
Business cycles

Cite this

Kraeussl, R.G.W. ; Lucas, A. ; Rijsbergen, D.R. ; van der Sluis, P.J. ; Vrugt, E.B. / Washington Meets Wall Street: A Closer Examination of the Presidential Cycle Puzzle. In: Journal of International Money and Finance. 2014 ; Vol. 43, No. May. pp. 50-69.
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Washington Meets Wall Street: A Closer Examination of the Presidential Cycle Puzzle. / Kraeussl, R.G.W.; Lucas, A.; Rijsbergen, D.R.; van der Sluis, P.J.; Vrugt, E.B.

In: Journal of International Money and Finance, Vol. 43, No. May, 2014, p. 50-69.

Research output: Contribution to JournalArticleAcademicpeer-review

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AB - We show that the annual excess return of the S&P 500 is almost 10 percent higher during the last two years of the presidential cycle than during the first two years. This pattern cannot be explained by business-cycle variables capturing time-varying risk premia, differences in risk levels, or by consumer and investor sentiment. We formally test the presidential election cycle (PEC) hypothesis as an alternative to explain the presidential cycle anomaly. The 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 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 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, as is often believed. © 2013 Elsevier Ltd.

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