Political sentiment and predictable returns

Jawad M. Addoum, Alok Kumar

Research output: Contribution to journalArticlepeer-review

21 Scopus citations


This study shows that shifts in political climate influence stock prices. As the party in power changes, there are systematic changes in the industry-level composition of investor portfolios, which weaken arbitrage forces and generate predictable patterns in industry returns. A trading strategy that attempts to exploit demand-based return predictability generates an annualized risk-adjusted performance of 6% during the 1939 to 2011 period. This evidence of predictability spans 17%-27% of the market and is stronger during periods of political transition. Our demand-based predictability pattern is distinct from cash flow-based predictability identified in the recent literature.

Original languageEnglish (US)
Pages (from-to)3471-3518
Number of pages48
JournalReview of Financial Studies
Issue number12
StatePublished - Dec 2016

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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