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

R. Kraeussl (), Andre Lucas, D. Rijsbergen (), Pieter van der Sluis and E. Vrugt
Additional contact information
R. Kraeussl: VU University Amsterdam
D. Rijsbergen: VU University Amsterdam
E. Vrugt: APG Investments
Authors registered in the RePEc Author Service: Roman Kräussl

No 08-101/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper tests the policitcal dimensions of the presidential cycle effect in U.S. financial markets. The presidential cycle effect states that average stock market returns are significantly higher in the last two years compared to the first two years of a presidential term. We confirm the robust existence of this cycle in U.S. stock markets as well as bond markets. As most rational theories to explain the cycle were falsified by earlier empirical work, this paper sets out to test the presidential cycle election (PCE) theory as an alternative explanation. The PCE theory states that incumbent parties and presidents have an incentive to manipulate the economy (via budget expansions, taxes, etc.) to remain in power. We formulate seven different propositions relating to fiscal, monetary, tax, and political implications of PCE theory. We find no statistically significant evidence confirming the PCE theory 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 mis-using their economic influence to remain in power.

Keywords: political economy; inefficient markets; market anomalies; calendar effects (search for similar items in EconPapers)
JEL-codes: E32 G14 P16 (search for similar items in EconPapers)
Date: 2008-10-23
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Related works:
Journal Article: Washington meets Wall Street: A closer examination of the presidential cycle puzzle (2014)
Working Paper: Washington Meets Wall Street: A Closer Examination of the Presidential Cylce Puzzle (2013)
Working Paper: Washington meets Wall Street: A closer examination of the presidential cycle puzzle (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20080101

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