Underreaction to Political Information and Price Momentum

Jawad M. Addoum, Stefanos Delikouras, Da Ke, Alok Kumar

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

In this study, we examine whether momentum in stock prices is induced by changes in the political environment. We find that momentum profits are concentrated among politically sensitive firms and industries. From 1939 to 2016, a trading strategy with a long position in winner portfolios (industries or firms) that are politically unfavored and a short position in losers that are politically favored does not generate significant momentum profits. Furthermore, our political-sensitivity-based long-short portfolio explains 23% to 27% (42% to 43%) of monthly stock (industry) momentum alphas. This explanatory power is concentrated around presidential elections, when the level of political activity is high. Collectively, our results suggest that investor underreaction to political information generates momentum in stock and industry returns.

Original languageEnglish (US)
JournalFinancial Management
DOIs
StateAccepted/In press - Jan 1 2018

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Industry
Underreaction
Price momentum
Momentum
Momentum profits
Investors
Presidential elections
Stock prices
Trading strategies
Political environment
Political activity

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Underreaction to Political Information and Price Momentum. / Addoum, Jawad M.; Delikouras, Stefanos; Ke, Da; Kumar, Alok.

In: Financial Management, 01.01.2018.

Research output: Contribution to journalArticle

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