Political sentiment and predictable returns

Jawad M. Addoum, Alok Kumar

Research output: Contribution to journalArticle

6 Citations (Scopus)

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

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Predictability
Sentiment
Industry
Stock prices
Climate
Return predictability
Trading strategies
Cash flow
Political transition
Risk-adjusted performance
Arbitrage
Investors

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Political sentiment and predictable returns. / Addoum, Jawad M.; Kumar, Alok.

In: Review of Financial Studies, Vol. 29, No. 12, 2016, p. 3471-3518.

Research output: Contribution to journalArticle

Addoum, Jawad M. ; Kumar, Alok. / Political sentiment and predictable returns. In: Review of Financial Studies. 2016 ; Vol. 29, No. 12. pp. 3471-3518.
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