Political Cycles and Stock Returns

Lubos Pastor and Pietro Veronesi

Journal of Political Economy, 2020, vol. 128, issue 11, 4011 - 4045

Abstract: We develop a model of political cycles driven by time-varying risk aversion. Agents choose to work in the public or private sector and to vote Democratic or Republican. 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, and risk aversion declines during Democratic presidencies. Public workers vote Democratic, while entrepreneurs vote Republican, as the model predicts.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (46)

Downloads: (external link)
http://dx.doi.org/10.1086/710532 (application/pdf)
http://dx.doi.org/10.1086/710532 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
Working Paper: Political Cycles and Stock Returns (2017)
Working Paper: Political Cycles and Stock Returns (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:doi:10.1086/710532

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().