Political Cycles and Stock Returns

Lubos Pastor and Pietro Veronesi

No 23184, NBER Working Papers from National Bureau of Economic Research, Inc

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 Democrat 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 Democrat while entrepreneurs vote Republican, as the model predicts.

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
Note: AP EFG POL
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Citations: View citations in EconPapers (19)

Published as Ľuboš Pástor & Pietro Veronesi, 2020. "Political Cycles and Stock Returns," Journal of Political Economy, vol 128(11), pages 4011-4045.

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Journal Article: Political Cycles and Stock Returns (2020)
Working Paper: Political Cycles and Stock Returns (2017)
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