Political Sentiment and Predictable Returns

Jawad M. Addoum and Alok Kumar

The Review of Financial Studies, 2016, vol. 29, issue 12, 3471-3518

Abstract: This study shows that shifts in political climate influence stock prices. As the party in power changes, there are systematic changes in the industry-level composition of investor portfolios, which weaken arbitrage forces and generate predictable patterns in industry returns. A trading strategy that attempts to exploit demand-based return predictability generates an annualized risk-adjusted performance of 6% during the 1939 to 2011 period. This evidence of predictability spans 17%27% of the market and is stronger during periods of political transition. Our demand-based predictability pattern is distinct from cash flow-based predictability identified in the recent literature.Received November 15, 2013; accepted April 5, 2016 by Editor Andrew Karolyi.

JEL-codes: G02 G10 G11 G14 G18 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (45)

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