Political sentiment and predictable returns

Jawad M. Addoum, Alok Kumar

Research output: Contribution to journalArticle

17 Scopus citations

Abstract

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
Volume29
Issue number12
DOIs
StatePublished - 2016

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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