Political uncertainty, market anomalies and Presidential honeymoons

Kam Fong Chan, Philip Gray, Stephen Gray and Angel Zhong

Journal of Banking & Finance, 2020, vol. 113, issue C

Abstract: The first 100 days of a newly-elected President's administration are often a period of substantial and concentrated policy change. This paper shows that measures of uncertainty and risk aversion rise sharply during Presidential honeymoons. Consistent with theoretical models that suggest that investors demand compensation for bearing heightened political risk, we document striking spread returns to value, investment and profitability anomalies during honeymoons. For example, the book-to-market value premium averages 3.51% per month during Presidential honeymoons, yet only 0.27% per month at other times. These findings survive numerous robustness checks. Nonetheless, establishing a direct link between escalating political risk and equity returns proves challenging.

Keywords: Presidential honeymoons; Market anomalies; Political uncertainty; Risk aversion; Value premium (search for similar items in EconPapers)
JEL-codes: D80 G11 G18 P16 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:113:y:2020:i:c:s0378426620300169

DOI: 10.1016/j.jbankfin.2020.105749

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