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 C.E.P.R. Discussion Papers

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)

Downloads: (external link)
https://cepr.org/publications/DP11864 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Political Cycles and Stock Returns (2020)
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:cpr:ceprdp:11864

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP11864

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().