PRESIDENTIAL ELECTION UNCERTAINTY AND COMMON STOCK RETURNS IN THE UNITED STATES

There is substantial evidence on the influence of political outcomes on the business cycle and stock market. We further hypothesize that uncertainty about the outcome of a U.S. presidential election should be reflected in pre‐election common stock returns. Prior research pools returns based on the party of the winning candidate, assuming that the outcome of the election is known a priori. We use candidate preference (i.e., polling) data to construct a measure of election uncertainty. We find that if the election does not have a candidate with a dominant lead, stock market volatility (risk) and average returns rise.     

Pushing the future back: The impact of policy uncertainty on the market pricing of future earnings

We examine whether policy uncertainty triggered by presidential elections pushes the future back by reducing the extent to which current prices reflect information about future earnings. We estimate future earnings response coefficients (FERCs) for the years 1975–2013, a period that covers ten presidential elections. We find that FERCs are significantly lower (by 11.8%) during presidential election years compared to other years. Additional analyses using pseudo election years, ex‐ante polls, contract prices from the Iowa Electronic Political Market, and cross‐sectional firm characteristics provide corroborating evidence that the lower FERCs during election years are related to policy uncertainty. We also investigate potential explanations for the lower FERCs during election years. We find that the lower FERCs relate to forecasting difficulty rather than to changes in the discount rate or in the amount of noise trading. Finally, we find that market prices move toward future earnings to a greater degree during presidential election years compared with other years once the policy uncertainty is resolved. A trading strategy based on this drift yields significant abnormal returns. Overall, we contribute to the literature by providing the first empirical evidence that shocks to policy uncertainty influence the pricing of earnings information.     

Aggregate earnings and market expectations in United States presidential election prediction markets

This study uses election futures market data to provide the first empirical evidence that aggregate earnings conveys timely “election-relevant” information effecting betting market participants' expectations about the likely outcomes of United States presidential election campaigns. I document that aggregate earnings news is associated with multiple facets of U.S. economic health affecting voter utility. I then use high-frequency data from the Iowa Electronic Political Prediction Market (IEM) to document that aggregate earnings news, including cash flow news, is significantly related to changes in the expected outcomes of U.S. presidential elections and incremental of other measures of economic health.     

US presidential elections and implied volatility: The role of political uncertainty

This paper focuses on the effects of political uncertainty and the political process on implied stock market volatility during US presidential election cycles. Using monthly Iowa Electronic Markets data over five elections, we document that stock market uncertainty, as measured by the VIX volatility index, increases along with positive changes in the probability of success of the eventual winner. The association between implied volatility and the election probability of the eventual winner is positive even after controlling for changes in overall election uncertainty. These findings indicate that the presidential election process engenders market anxiety as investors form and revise their expectations regarding future macroeconomic policy.     

How Do Firms Respond to Political Uncertainty? Evidence from U.S. Gubernatorial Elections

We examine the joint response to political uncertainty along two margins: changes in real activity and voluntary disclosure. We focus on within-firm variation in exposure to ex ante competitive U.S. gubernatorial elections using data on preelection poll margins and firms’ state exposures. Despite real activity falling in the years leading up to a close election, we find that voluntary disclosure increases both in frequency and content, including mentions of risk in filings that reference states holding elections. Our tests use a decomposition of 8-K filings into real activity and voluntary disclosure to address the endogenous complementarity between these two responses. These results hold when using alternative ex ante measures of political uncertainty based on term-limited incumbents, historically competitive offices, or state legislature gridlock. Both effects of political uncertainty are stronger for firms in highly regulated industries and weaker for those least exposed to the local market, linking the real activity and disclosure responses to uncertainty.     

The Effect of the Alternation in the Ruling Party on Three-Factor Risks and Returns in ETF: The Case of Presidential Elections in Taiwan

This study discusses the effect of alternation in the ruling party in presidential elections on three-factor risks and returns of the three main exchange-traded funds (ETFs) in Taiwan, which has an unclearly defined international status and whose citizens have the right to vote directly for the president. We find that after the ruling party has been determined, in the period between Election Day and inauguration day, both the stock market and ETFs show a slight rise in prices. This suggests that most investors are initially optimistic after the election results have been announced. Meanwhile, the reverse book-to-market risk value deteriorates significantly. These results indicate that political uncertainty increases the risk premium of market factors and reverse book-to-market factors for some ETFs.     

The impact of unions on municipal elections and urban fiscal policies

The efficient decentralized provision of public goods requires that special interest groups, such as municipal unions, do not exercise undue influence on the outcome of municipal elections and local fiscal policies. We develop a new political economy model in which a union can endorse one of the candidates in a local election. A politician that prefers an inefficiently large public sector can, therefore, win an election if the union can provide sufficiently strong support during the campaign. We have assembled a unique data set that is based on union endorsements that are published in leading local newspapers. Our empirical analysis focuses on municipal elections in the 150 largest cities in the U.S. between 1990 and 2012. We find that challengers strongly benefit from endorsements in competitive elections. Challengers that receive union endorsements and successfully defeat an incumbent also tend to adopt more union friendly fiscal policies.     

Political uncertainty and the 2012 US presidential election: A cointegration study of prediction markets,polls and a stand-out expert

Political uncertainty is increasingly seen as important to financial markets. Particularly US presidential election uncertainty is linked to uncertainty regarding future US macroeconomic policy. But what is the best vehicle to measure political uncertainty? We examine both the cointegration and causal relationships between the Iowa and Intrade presidential futures markets (IOWA, INTRADE), along with the results of election polls (POLLS); as well as published election predictions of Nate Silver (SILVER), who was arguably the most followed political forecaster during the 2012 presidential election season. We document strong evidence that SILVER and the two prediction markets were all highly cointegrated; while POLLS was not. Consistent with the assertion made by others that INTRADE prices were manipulated in 2012 for non-pecuniary reasons, we also evidence that IOWA and SILVER both Granger-caused INTRADE. Our findings are also consistent with previous findings that election markets outperform polls as prediction vehicles. Overall, while confirming that INTRADE, IOWA and SILVER are cointegrated, we note that the three series consistently differed in the degree of optimism in an Obama victor. These results pose important questions for researchers interested in estimating political uncertainty, and assessing the efficacy of prediction markets and their international integration.     

TRADING COSTS OF NON‐U.S. STOCKS ON THE NEW YORK STOCK EXCHANGE: THE EFFECT OF INSTITUTIONAL OWNERSHIP,ANALYST FOLLOWING,AND MARKET REGULATION

We investigate the differences in market microstructure between U.S. and non‐U.S. stocks cross‐listed on the New York Stock Exchange using a sample of 316 pairs of matched stocks. We find that non‐U.S. stocks have wider spreads and larger adverse‐selection costs than U.S. stocks even after controlling for macro‐level institutional differences. Regression analysis shows that spreads and adverse‐selection costs are negatively correlated with institutional ownership and analyst followings. Thus, the higher spreads and adverse‐selection costs for non‐U.S. stocks can be partly explained by the lower institutional ownership and analyst following of non‐U.S. stocks. In addition, we find that although the spreads and adverse‐selection costs for non‐U.S. stocks are significantly higher before the implementation of Regulation Fair Disclosure (FD), the differences become even greater after Regulation FD, suggesting that Regulation FD has improved the information environment for U.S. stocks.     

U.S. industrial policy: inevitable and ineffective

In the realm of political economy, much of the 1980s in the United States was spent debating the pros and cons of industrial policy. According to Kevin P. Phillips, the debate is now over. Regardless of who wins the 1992 presidential election, the United States will have some kind of industrial policy--but not the one it needs. In "U.S. Industrial Policy: Inevitable and Ineffective," Phillips details the economic and political forces that are propelling the U.S. toward industrial policy--and the forces that will keep the policy from being effective.     

Is U.S. economic policy uncertainty priced in China's A-shares market? Evidence from market,industry, and individual stocks

This paper is motivated by Bali, Brown, and Tang (2017) who find U.S. economic policy uncertainty (EPU) is priced in the cross-section of U.S. stock returns, and uses weekly data from March 2006 to April 2016 to study whether shocks in U.S. EPU also influence prices of China's A-shares from a market, industry, and individual stock perspective. Our methodology relies on an ARMA (1,1) model to extract shocks in the U.S. EPU series and a GARCH (1,1) model to examine how returns of China's A-shares respond to these shocks after controlling for business conditions proxied by term and credit spread in China. Generally, we find that shocks in U.S. EPU significantly and negatively explain returns of Chinese A-shares with a lag of one week. In addition, the market index containing small and growth stocks is more sensitive to shocks in U.S. EPU than the index containing big and value stocks. Furthermore, we find that firms in manufacturing, information technology, and media industries in China are more sensitive to shocks in U.S. EPU, while firms in agriculture and real estate industries respond less to shocks in U.S. EPU. Finally, China's A-shares which decline more in response to shocks in U.S. EPU have higher returns, smaller market capitalization, weaker operating profitability, higher asset growth, and better past year's cumulative returns. Overall, our findings show that investors in the Chinese A-shares market require a premium to hold stocks that are sensitive to shocks in U.S. economic policy uncertainty.     

Political Uncertainty and Corporate Investment Cycles

We document cycles in corporate investment corresponding with the timing of national elections around the world. During election years, firms reduce investment expenditures by an average of 4.8% relative to nonelection years, controlling for growth opportunities and economic conditions. The magnitude of the investment cycles varies with different country and election characteristics. We investigate several potential explanations and find evidence supporting the hypothesis that political uncertainty leads firms to reduce investment expenditures until the electoral uncertainty is resolved. These findings suggest that political uncertainty is an important channel through which the political process affects real economic outcomes.     

The calming effects of conflict: The impact of partisan conflict on market volatility

In recent decades, an increasing divide in political ideologies between Republicans and Democrats has had a notable impact on financial markets. In this paper, we investigate the effect of political conflict, as measured by the partisan conflict index (PCI), on both market and industry-level volatility. We find that PCI has a significant negative impact on market volatility, robust to different regression models. We provide evidence that such impact is not driven by dramatic political events, namely wars and presidential elections, or by presidential party. When controlling for market cycles, we show that PCI reduces volatility during expansionary periods but increases volatility during recessions. Furthermore, at the industry level, we find that PCI decreases volatility overall. We also find that PCI decreases the volatility of politically-sensitive industries significantly more that it does with other industries. These results can inform government policy makers, analysts, investors, and academics alike.     

Is There a Dead Spot? New Evidence on FOMC Decisions Before Elections

Using new data that chronicle the Fed's internal forecast of the output gap from 1973 to 1998, this paper tests for an electoral cycle in the decisions of the Federal Open Market Committee (FOMC). The paper provides evidence of a dead spot in the committee's decisions before presidential elections. For given values of these internal forecasts, the FOMC is less likely to decide to tighten monetary policy in the year preceding a presidential election than at other times.     

A comprehensive investigation on the predictive power of economic policy uncertainty from non-U.S. countries for U.S. stock market returns

This study uses economic policy uncertainty (EPU) indices for ten developed countries, three diffusion models, and five combination methods to forecast excess returns in the U.S. stock market. It shows empirically that, over the period January 1997 to January 2022, non-U.S. EPU indices have better predictive power for U.S. equity market excess returns than the U.S. EPU index itself. This illustrates how economic information from international markets can affect the U.S. stock market. This finding challenges the extensively recognized view that the U.S. is where important market signals are initially transmitted to other markets, suggesting that this belief is incomplete. Our outcomes are robust to a battery of tests covering model selection, model specification, forecast horizons, and the pandemic period, and their economic values are assessed. The findings are essential for the financial field to confront future fierce situations and crises.     

Washington meets Wall Street: A closer examination of the presidential cycle puzzle

We show that the annual excess return of the S&P 500 is almost 10 percent higher during the last two years of the presidential cycle than during the first two years. This pattern cannot be explained by business-cycle variables capturing time-varying risk premia, differences in risk levels, or by consumer and investor sentiment. We formally test the presidential election cycle (PEC) hypothesis as an alternative to explain the presidential cycle anomaly. The PEC states that incumbent parties and presidents have an incentive to manipulate the economy (via budget expansions and taxes) to remain in power. We formulate eight testable propositions relating to the fiscal, monetary, tax, unexpected inflation and political implications of the PEC hypothesis. We do not find statistically significant evidence confirming the PEC hypothesis as a plausible explanation for the presidential cycle effect. The presidential cycle effect in U.S. financial markets thus remains a puzzle that cannot be easily explained by politicians employing their economic influence to remain in power, as is often believed.     

Policy Uncertainty and Bank Mortgage Credit

We document that banks reduce the supply of mortgage loans when policy uncertainty increases in their headquarter states as measured by the timing of U.S. gubernatorial elections. The reduction is larger for term-limited elections and close elections. We utilize high-frequency, geographically granular loan-level data to address an identification problem arising from changing local loan demand: (i) we estimate a difference-in-difference specification with state/time or county/time fixed effects; (ii) banks reduce lending outside their home states as well when their home states hold elections; and (iii) we observe important cross-sectional differences in the way banks with different characteristics respond to policy uncertainty.     

Economic policy uncertainty and cross-border lending

Banks increase cross-border syndicated lending when domestic economic policy uncertainty is high, after controlling for credit demand at the borrower country or country-industry levels. The credit migration effects are strongest for banks with diverse income and when banks face fiercer competition. Using elections as a source of plausibly exogenous variation which positively affects political uncertainty, we provide causal evidence on the effects of political uncertainty on cross-border lending. In countries with exogenous election timings, banks increase cross-border lending during the election period, especially when elections are closely fought. Compared to the extant literature, which extensively documents the negative effect of uncertainty on real investment, our findings show that uncertainty affects investments in financial assets differently.     

Performance of State-Owned Enterprises During Public Elections: The Case of Korea

State-owned enterprises (SOEs) pursue multiple goals to maximize public welfare. Therefore, governments must evaluate both their economic efficiency and their social effectiveness. However, government performance evaluation (GPE) of SOEs may be affected by political motives. This paper investigates whether SOEs are fairly evaluated by governments during political events. Using Korean data, we find no significant relation between public elections (presidential and national assembly elections) and the financial performance of SOEs. However, the GPE scores of SOEs are significantly lower in years in which a public election is held than in other years. In addition, the GPE of SOEs can be an important determinant of whether or not to replace CEOs. This research sheds light on the political use of the GPE for SOEs.     

Did the financial crisis affect the market valuation of large systemic U.S. banks?

We examine the impact of the financial crisis on the stock market valuation of large and systemic U.S. bank holding companies (BHCs). Using the Bertsatos and Sakellaris (2016) model of fundamental valuation of bank equity, we provide evidence that the financial crisis has not altered investors’ attitudes towards bank characteristics. In particular, before, during, and after the crisis, investors in large and systemic U.S. BHCs seemed to penalize leverage, albeit temporarily. Both before and after the crisis, they reward size in the short run. This pattern is appearing only briefly during the crisis. We also show that bank opacity plays no role in market valuation either in the short run or in the long run. Last but not least, we find evidence that stress testing has been informative to the market and that those BHCs that failed at the post-crisis stress tests were not subsequently valued differently by the market.