Resolving the Presidential Puzzle |
| |
Authors: | Oumar Sy Ashraf Al Zaman |
| |
Affiliation: | 1. Oumar Sy is an Associate Professor at Dalhousie University in Halifax, Nova Scotia, Canada.;2. Ashraf Al Zaman is an Associate Professor in the Department of Finance at St. Mary's University in Halifax, Nova Scotia, Canada. |
| |
Abstract: | Many financial economists are puzzled by the fact that stock returns are higher under Democratic than Republican presidencies. In this paper, we test whether this return differential is explained by risk using a conditional version of the Fama and French (1993) model that allows risk to vary across political cycles. We find that the presidential puzzle can be explained when risk is properly taken into account. Much of the return differential can be attributed to the fact that Democratic presidencies are associated with higher market and default risk premiums than their Republican counterparts. |
| |
Keywords: | |
|
|