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Resolving the Presidential Puzzle
Author(s) -
Sy Oumar,
Al Zaman Ashraf
Publication year - 2011
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2011.01144.x
Subject(s) - presidential system , economics , democracy , stock (firearms) , differential (mechanical device) , financial economics , default risk , politics , stock market , monetary economics , econometrics , political science , actuarial science , credit risk , law , history , context (archaeology) , archaeology , engineering , aerospace engineering
Many financial economists are puzzled by the fact that stock returns are higher under Democratic than Republican presidencies. In this paper, we test whether this return differential is explained by risk using a conditional version of the Fama and French (1993) model that allows risk to vary across political cycles. We find that the presidential puzzle can be explained when risk is properly taken into account. Much of the return differential can be attributed to the fact that Democratic presidencies are associated with higher market and default risk premiums than their Republican counterparts.