PARTISAN POLITICS, INTEREST RATES AND THE STOCK MARKET: EVIDENCE FROM AMERICAN AND BRITISH RETURNS IN THE TWENTIETH CENTURY

Bumba Mukherjee and David Leblang

Economics and Politics, 2007, vol. 19, issue 2, 135-167

Abstract: We examine the relationship between government partisanship, interest rates and the mean and volatility of stock prices in the United States and United Kingdom. We suggest that traders in the stock market rationally expect higher (lower) post‐electoral interest rates during the incumbency of the left‐wing (right‐wing) party – Democrats and Labor (Republican and Conservative) – and in election years when they expect the left‐wing (right‐wing) party to win elections. We hypothesize that expectations of higher (lower) interest rates decrease (increase) the mean and volatility of stock prices during the actual incumbency or even anticipation of a left‐wing (right‐wing) party holding the office of the chief executive. Results from empirical models estimated on data from U.S. and U.K. markets over most of the twentieth century statistically support our claims.

Date: 2007
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