Is presidential cycle in security returns merely a reflection of business conditions?

James R. Booth, Lena Booth

    Research output: Contribution to journalArticle

    43 Citations (Scopus)

    Abstract

    We confirm previous findings that both large-cap and small-cap stock returns in the US exhibit a presidential cycle pattern, i.e. returns are significantly higher in the last 2 years than in the first 2 years of the presidential term. We attempt to examine if this presidential cycle pattern can be explained away by the traditional business cycle proxies, namely the term spread (TERM), dividend yield (D/P), and default spread (DEF). Our motivation arises from the political business cycle theory that monetary and fiscal measures undertaken by presidents are usually translated into the business cycle. We find that the presidential cycle has explanatory power beyond business conditions proxies shown to be important in explaining stock returns. Tests of slope parameters show that stock returns are less sensitive to only the D/P during the last 2 years of the presidential term. The presidential cycle effect prevails even after controlling for the party in power and the incumbent versus nonincumbent presidents.

    Original languageEnglish (US)
    Pages (from-to)131-159
    Number of pages29
    JournalReview of Financial Economics
    Volume12
    Issue number2
    DOIs
    StatePublished - 2003

    Fingerprint

    Security returns
    Stock returns
    Business cycles
    Political business cycles
    Term spread
    Business cycle theory
    Fiscal
    Incumbents
    Dividend yield

    Keywords

    • Business cycle
    • Monetary policy
    • Political business cycle
    • Presidential cycle
    • Stock returns

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Finance

    Cite this

    Is presidential cycle in security returns merely a reflection of business conditions? / Booth, James R.; Booth, Lena.

    In: Review of Financial Economics, Vol. 12, No. 2, 2003, p. 131-159.

    Research output: Contribution to journalArticle

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