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.