Political Cycles and Stock Returns

Pástor, Luboš and Pietro Veronesi
Authors registered in the RePEc Author Service: Lubos Pastor

No 11864, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a model of political cycles driven by time-varying risk aversion. Heterogeneous agents make two choices: whether to work in the public or private sector and which of two political parties to vote for. In equilibrium, when risk aversion is high, agents elect Democrats---the party promising more redistribution. The model predicts higher average stock market returns under Democratic presidencies, explaining the well-known ``presidential puzzle." The model can also explain why economic growth has been faster under Democratic presidencies. In the data, Democratic voters are more risk-averse. Public workers vote Democrat while entrepreneurs vote Republican, as the model predicts.

Keywords: Political cycles; Risk aversion; Presidential puzzle (search for similar items in EconPapers)
JEL-codes: D72 G12 G18 P16 (search for similar items in EconPapers)
Date: 2017-02
New Economics Papers: this item is included in nep-fmk and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Related works:
Journal Article: Political Cycles and Stock Returns (2020)
Working Paper: Political Cycles and Stock Returns (2017)
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