Document Type

Student Presentation

Presentation Date

4-15-2019

College

College of Business and Economics

Department

Department of Economics

Faculty Sponsor

Dr. Kelly Chen

Abstract

A pricing anomaly has been identified in the financial economics literature concerning market returns and the presidential political cycle, but it has yet to be fully explained. Monthly market return data from 1927 to 2018 shows the average return in excess of the risk free rate is higher when the president in office is a Democrat. Previous studies attribute this differential to either differences in market and size risk or systematic positive surprises resulting from the policy decisions of Democrat presidents. Recent returns data and sub-period data appears to conflict with these studies. This analysis uses a five factor risk based conditional model and the Fama-Macbeth regression method to locate which type of asset is responsible for the premium, and the nature of the risk premium involved. This may lead to a connection between a specific factor premium and some characteristic associated with democrat administrations, or possibly a behavioral mispricing on the part of individual investors in regard to the presidential cycle.

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