Secondary data – the data in this research was obtained from journals, articles, research papers and economic letters written by scholars, economist specialists and analysts both from US and other parts of the world as well all featuring the reaction of stock market towards the US political elections.
Data was also obtained from CRSP US stock databases encompassing the data in monthly and quarterly basis. It includes historical indexes which serve as benchmarks for the investment community and as a foundation for this research paper. It contains index series that contains portfolios ranked in deciles.
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The study is to be carried by reviewing the secondary data sources such as data on economic letters, research papers, articles and journal with data collected by specialists, scholars and experts studying the United States Stock market and its returns. Notably, these analysts can be from US or other parts of America but must study the responsiveness of US markets to political elections.
This is political elections and stock market study making use of summarized descriptive statistics to determine the reaction of the US stock market to political reactions.
Moreover, the study has made use of hypothesis. Some of these hypotheses include:
H1: Available Information on election does not fully incorporate the stock prices.
H2: the results of the stock market do not show any democratic or republican premium.
H3: The generated abnormal returns and trading volume will be higher for some specific factors.
The research will also make use of new political models and also the use interview with Professor Alesina on the question, “what progress has been made in regard to the development of the new political macroeconomics?”
Additionally, we can gauge the reaction of stock market to political elections by gauging the reaction of stock market distribution to political elections using the volatility-event study approach.
The study takes into use the reaction of stock market returns on quarterly basis in percentage from the year 1871 to 1997 and also from 2000 to 2012.
The study features the responsiveness of the US stock market to various political elections and presidential heads.
The variables in this case are not control variables as they keep on changing.
In the methodology chapter I will makes use of formulas, econometric models and equations in an attempt to calculate the relevant stock market returns as witnessed by different political elections. These equations will be of great importance once it comes to the analysis of data on stock returns as a result of different political wings. These formulas include calculation of returns using the formula:
Abnormal Returns= Actual Returns minus Expected Returns.
More of interest this formula will be used to calculate abnormal volume during the political election periods. Moreover, I will make use of the five factor model by Fama and French in the analysis of the stock market returns. This econometric model makes use of five factors (2×3) in its computation of market stock returns. These factors include company size, company price-to-book ratio, market risk, profitability and investment. Firstly, it is constructed using the 6 value-weight portfolios formed depending on size and book-to-book-market. Secondary, the 6 value-weight portfolios formed on size and operating profitability, and thirdly the 6 value-weight portfolios formed on size and investment. Particularly, the five-factor model improves the explanatory power of the returns of stocks. Therefore, to use the five factor model one has to take keen note on the following formulas and terms.
SMB (B/M) = 1/3 (Small Value + Small Neutral + Small Growth)
– 1/3 (Big Value + Big Neutral + Big Growth).
SMB (OP) =1/3 (Small Robust + Small Neutral + Small Weak)
– 1/3 (Big Robust + Big Neutral + Big Weak).
SMB (INV) = 1/3 (Small Conservative + Small Neutral + Small Aggressive)
– 1/3 (Big Conservative + Big Neutral + Big Aggressive).
SMB =1/3 (SMB(B/M) + SMB(OP) + SMB(INV) ).
HML =1/2 (Small Value + Big Value)
– 1/2 (Small Growth + Big Growth).
RMW =1/2 (Small Robust + Big Robust)
– 1/2 (Small Weak + Big Weak).
CMA =1/2 (Small Conservative + Big Conservative)
– 1/2 (Small Aggressive + Big Aggressive).
Rm-Rf, the excess return on the market, value-weight return of all CRSP firms incorporated in the US and listed on the NYSE, AMEX, or NASDAQ that have a CRSP share code of 10 or 11 at the beginning of month t, good shares and price data at the beginning of t, and good return data for t minus the one-month Treasury bill rate (from Ibbotson Associates).
Also, to test the impact or reaction of stock market as a result of political election can be assessed by use bootstrap methodology of Efron (1979). Similarly, taking into consideration the cumulative abnormal volatility during the election period and then comparing it with the empirical distribution of Cumulative Abnormal Volatility simulated under the null hypothesis could also work. Furthermore, the volatility of the stock market can be estimated by use of regression analysis. Besides, the plotting of a correlation graph could also help to establish the relationship between stock markets and political elections. If a graph of the political year is plotted against the stock market returns and the data scatters from lower left to upper right then we conclude that the two variables are positively correlated and the opposite is true.
The data below was collected from articles, journal and research papers written by different experts, political and business expertise as well as economists as it will be shown below in data provided in depth.
The research study will use secondary data based on data collected by philosophers, business experts, and economists (the articles, journals and economic and research letters are analyzed).
Democratic or Republican presidents
The stock markets
The annual Stock Returns
The stock market returns of the United States America as a result of political election whether within or outside the country.
The reaction of other countries’ stock market returns as a result of US political elections.
This chapter includes all key areas where the data being studied on the reaction of US stock market in relevance to the political elections can be obtained, found or collected from. Most of the data in this research paper has been obtained from CRSP US stock databases. A few other research papers have been used to support the data from CRSP US stock database.
Grant 71 – 72
Grant 73 – 76
Hayes 77 – 80
Gar/Art 81 – 84
Harrison 89 – 92
McKinley 97 – 00
McKin/RT 01 – 04
Roosevelt 05 – 08
Taft 09-09 – 12
Quarterly Returns (%)
Harding/Cool 21 – 24
Coolidge 25 – 28
Hoover 29 – 32
Eisenhower 53 -56
Eisenhower 57 -60
Nixon 69 – 72
Ford 73- 76
Reagan 81 – 84
Reagan 85 – 88
Annual Returns (%)
BUSH 89 – 92
Table1. Shows the Average quarterly analysis of the stock market returns from 1871 – 1997 when the Republican Presidents were in power.
Graph1. Illustrates the quarterly stock market returns from 1871 – 1997 in percentage under the leadership of Republican Presidents.
Wilson 13 – 16
Wilson 17 -20
Roosevelt 37 -40
Roosevelt 41 -44
DR/Truman 45 -48
Truman 45 -48
Quarterly Stock Returns (%)
JFK/LBJ 61 – 64
Johnson 65 -68
Carter 77 – 80
Clinton 93 -96
Quarterly Stock Returns (%)
Table 1.0 shows the quarterly stock market returns for democratic presidents for the year 1871-1997 in percentage.(Extracted from FRBSF Economic Letter).
Graph 1.0 Illustrates the amount of stock market returns for democratic presidents as from 1871-1997.
iii. Moreover, according to the researches carried by Yale Hirsch, in his journal The Presidential Election Cycle, he exemplified that the stock markets tended to be strongest at the third year of presidency (Kräussl et al 2014). More data still argues not dictate that the first year that averagely, the S&P 500 realizes 17.5% gains in the third year of a president’s first term whereas in the second term it experiences a drastic drop down to 11.5% stock market returns. However this does not mean that year 3 is always the best. It is known that the stock market experiences some volatility in the first year after elections as the market is already trying to adapt to the new changes hence it reports minimal stock market returns. The returns gradually grow to its peak in the second year with the third year registering highest returns. In cases of run off of political elections the returns in the stock market tend to grow sideways as a lot of uncertainties arise. During the final year of an election cycle the average stock market returns fall to 6.1% during the last year of that elections term (http://www.nasdaq.com/article/how-presidential-elections-affect-the-stock-markets-cm586601#ixzz4i6D0wyss).
vii. The new political macroeconomics – this sought of data provides the relationship between the political factors arising from a political election and macroeconomic concepts which are very vital in dealing with the stock market returns. It takes key note on the political factors that really affect the business cycles and during the process they end up interfering with the performance of US stock market. Beyond, they include factors such as conduct and implementation of stabilization policies, inflation, budget deficits among others. (Alesina, 1987).
viii. In general data on the reaction of stock market to the political elections from was extracted from voters by rational investors by use of methods such as polls, electoral debate, and synthesis of macroeconomic data. Moreover, according to Dana Anaspach (2016) the stock markets have always had a strong positive correlation with the political elections in The United States of America. The elections have consequently reported more positive impacts to the stock markets as compared to the negative impacts. This idea of Anaspach is later expounded by Marshall D. Nickles in his article known as Presidential Elections and Stock Market Cycles. Furthermore, his data continues to argue that for an investor to realize good stock market returns the best time to invest is on October 1st during the second year of the presidential term and sell on December 31st of the four year and this would attract profitable outcomes. Other specialists who join hands with Marshall on the idea are Junkans, CFA, and their Senior Investment Manager, James P. Estes, PhD, CFP(1) they exemplify that the average stock market return in the fourth year of a presidential term is twice that of the return in the first year of a president’s term. The stock market returns of the last recent 17 years are shown below.
Table1.1 above Market Returns for the Recent Election Years Since 2000
In summary, with emergence of well stabilized market forces and control over inflation, the rate of volatilization in stock markets can be overcome. With many specialists dealing timely with the major causal agents of volatility in the stock market returns (Bialkowski et al, 2008).
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