The effect of Presidential Elections on the Stock Market and Investor Behavior

Abstract

The purpose of this paper is to analyze the United States presidential elections and their effect on stock market movements. This paper studies the effects of the presidential elections, more precisely the term and political party of the winning candidate, on the S&P 500 as well as the OMXH indices. In addition to this, the effect on SIC industry sectors in the United States and Finland are assessed to find out if some sectors are more affected by the elections. Can some consistent factors that increase or decrease the stock market volatility be found and how does these factors affect the individuals’ investment behavior? The time series is split into two segments, one covering the pre-election period and one covering the post-election period.

In this paper the indices are studied using dummy regressions for each of the variables under assessment. The SIC sectors are studied by constructing industry specific portfolios of the index constituents. These portfolios are rebalanced each time a new stock is introduced to the index. This study uses two sets of data. The index data for both United States and Finland is on a weekly frequency to capture more sudden movements. The S&P 500 covers the time period from January 1967 to August 2017. The Finnish data set is smaller, starting on January 1987 and ending in August 2017. The portfolios are constructed so that they cover the period between January 1973 and August 2017. For Finland this is also shorter starting on May 1988 and ending on August 2017.

This paper contributes to the existing literature by partly confirming previous findings that during the presidential elections there are certain visible effects and changes in the financial market. The main findings of this paper show that the pre-election period is very enthusiastic and a news rich time-period and thus experiences higher returns than during the post-election periods. Reason for this occurrence may be the investors tendency towards news and new information which may lead to actions. The analysis covering the sectors shows similar results indicating a presence of a better promise of the future and lower returns after a candidate is chosen. For Finland the results are the opposite. All of the major findings are in the post-election periods and indicate that the pre-election hype is local and once the results come, the cross-country effects materialize.