Political Cycles and Stock Returns / Lubos Pastor, Pietro Veronesi.

Format:

Book

Author/Creator:

Pastor, Lubos.

Contributor:

National Bureau of Economic Research.

Veronesi, Pietro.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23184.

NBER working paper series no. w23184

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

We develop a model of political cycles driven by time-varying risk aversion. Agents choose to work in the public or private sector and to vote Democrat or Republican. In equilibrium, when risk aversion is high, agents elect Democrats--the party promising more redistribution. The model predicts higher average stock market returns under Democratic presidencies, explaining the well-known "presidential puzzle." The model can also explain why economic growth has been faster under Democratic presidencies. In the data, Democratic voters are more risk- averse and risk aversion declines during Democratic presidencies. Public workers vote Democrat while entrepreneurs vote Republican, as the model predicts.

Notes:

Print version record

February 2017.