Research / BFI Working PaperJan 01, 2017

Political Cycles and Stock Returns

We develop a model of political cycles driven by time-varying risk aversion. Heterogeneous agents make two choices: whether to work in the public or private sector and which of two political parties to vote for. The model implies that when risk aversion is high, agents are more likely to elect the party promising more fiscal redistribution. The model predicts higher average stock market returns under Democratic than Republican presidencies, explaining the well-known “presidential puzzle.” Under sufficient complementarity between the public and private sectors, the model also predicts faster economic growth under Democratic presidencies, which is observed in the data.

More Research From These Scholars

BFI Working Paper Feb 23, 2018

Can Blockchain Solve the Holdup Problem in Contracts?

Anup Malani, Richard Holden
Topics:  Technology & Innovation
BFI Working Paper Apr 30, 2021

Quantifying Market Power and Business Dynamism

Jan De Loecker, Jan Eeckhout, Simon Mongey
Topics:  Uncategorized
BFI Working Paper Jun 10, 2022

Does Information Affect Homophily?

Yana Gallen, Melanie Wasserman
Topics:  Employment & Wages