Political Cycles and Stock Returns

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.

Keywords: political cycles, risk aversion, presidential puzzle

JEL Classification: G12, G18, D72, P16

Suggested Citation: Suggested Citation

Pastor, Lubos and Veronesi, Pietro, Political Cycles and Stock Returns (May 26, 2019). Chicago Booth Research Paper No. 17-01, Fama-Miller Working Paper , Available at SSRN: https://ssrn.com/abstract=2909281 or http://dx.doi.org/10.2139/ssrn.2909281

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-4080 (Phone)
773-702-0458 (Fax)

HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

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

Download This Paper

Open PDF in Browser

38 References

Alberto Alesina

Macroeconomic policy in a two-party system as a repeated game

Quarterly Journal of Economics , volume 102 , p. 651 - 678 Posted: 1987

Crossref
Alberto Alesina , Howard Rosenthal

Partisan Politics, Divided Government, and the Economy Posted: 1995

Crossref
Alberto Alesina , Nouriel Roubini , Gerald D Cohen

Political Cycles and the Macroeconomy Posted: 1997

Crossref
Alberto Alesina , Jeffrey Sachs

Political parties and the business cycle in the United States

Journal of Money, Credit, and Banking , volume 20 , p. 63 - 82 Posted: 1948

Crossref

54 Citations

Maurizio Montone

Does the U.S. President Affect the Stock Market?

Journal of Financial Markets, Volume 61, November 2022, 100704. · 43 Pages · Posted: 2 Nov 2014 · Last revised: 21 Nov 2022 · Downloads: 324

Download PDF
Ruchith Dissanayake

Government Spending Shocks, Consumption Dynamics, and Asset Prices

29th Australasian Finance and Banking Conference 2016 · 45 Pages · Posted: 25 Jun 2016 · Last revised: 2 Jun 2023 · Downloads: 415

Download PDF
Lubos Pastor , Pietro Veronesi

Inequality Aversion, Populism, and the Backlash Against Globalization

Chicago Booth Research Paper No. 20-11, Fama-Miller Working Paper · 58 Pages · Posted: 1 Aug 2018 · Last revised: 5 Dec 2020 · Downloads: 1,447

Download PDF
Ingolf Dittmann , Maurizio Montone , Yuhao Zhu

Wage Gap and Stock Returns: Do Investors Dislike Pay Inequality?

Journal of Corporate Finance, Volume 78, February 2023, 102322, European Corporate Governance Institute – Finance Working Paper No. 727/2021, · 60 Pages · Posted: 18 Aug 2018 · Last revised: 6 Feb 2023 · Downloads: 351

Download PDF

Do you have a job opening that you would like to promote on SSRN?

Place Job Opening

Paper statistics

Downloads

2,604

Abstract Views

11,654

Rank

10,513

54 Citations

38 References

PlumX Metrics

Feedback

Political Cycles and Stock Returns

Lubos Pastor

Pietro Veronesi