Political Cycles and Stock Returns

44 Pages Posted: 2 Mar 2017 Last revised: 22 Oct 2018

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Pietro Veronesi

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2017

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, presidential puzzle, risk aversion

JEL Classification: D72, G12, G18, P16

Suggested Citation

Pastor, Lubos and Veronesi, Pietro, Political Cycles and Stock Returns (February 2017). CEPR Discussion Paper No. DP11864, Available at SSRN: https://ssrn.com/abstract=2924684

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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Pietro Veronesi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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