Found this at http://www.anderson.ucla.edu/alumni/assets/news.html. Finance Professors Pedro Santa-Clara and Rossen Valkanov Find Higher Equity Premium Under Democratic Presidents: Researchers conduct analysis of the connection between presidential elections and the stock market and find some surprising and significant results. The old adage that Republican presidents are good for business may be little more than a myth, according to research recently completed by Anderson finance professors Pedro Santa-Clara and Rossen Valkanov. A close examination by the two researchers of the stock market's average performance during Republican and Democratic presidencies reveals that returns are much higher when a Democrat is in office. The two researchers arrive at their findings by analyzing the returns an investor would receive from placing his or her money in the equity market rather than T-bills over the period from 1927 to 1998. Under Democratic presidents, the average excess return of investments in the stock market over the three-month Treasury bill is about 11 percent. Under Republicans, it is less than two percent; a nine percent difference. Examination of the risk-free interest rate produces another noteworthy result: under Republicans, the real T-bill rate is, on average, higher than the rate under Democrats by more than three percent. The difference is even more striking when Santa-Clara and Valkanov examine stock portfolios formed according to the companies' market capitalization. Small cap stocks realize an average excess return of 18 percent during Democratic presidencies; while under Republican ones, the return was -3 percent. The difference in returns for large caps was approximately seven percent. With hindsight, one can argue that those results are attributable to differences in the business cycle during Republican and Democratic presidencies, and a correlation between the business cycle and expected stock market returns. In fact, it is commonly accepted that the president's policies have an effect on the economy that, in turn, impacts the stock market. To take into account potential differences in economic conditions, the two researchers control for a vast number of macroeconomic variables, such as an indicator of recessions, the slope of the yield curve and credit spreads of bonds, that help remove the effect of business cycle fluctuations. Their surprising results hold: returns under Democrats are still, on average, higher. Secondly, the researchers examine various subsamples to be sure that their results are not driven by any particular presidency or major event. The market data in the study covers the time period of 1927-1998. In order to remove the effects of any one particular presidency or event, Santa-Clara and Valkanov divide the sample into two smaller sub-samples: 1946-1998 (excluding the Great Depression and WWII) and 1960-1998 (modern times). The results remain unaffected. Can the higher returns under Democrat presidents be explained as compensation for the potentially higher risk incurred by stock market investors? After all, Democrats and Republicans usually put into place different economic policies. If Democratic policies are seen as more risky, or at least make investors more uncertain, Santa-Clara and Valkanov conjecture, then perhaps that higher risk would explain the higher returns they discover. However, to the contrary, the two find that market volatility, a measure of risk, is actually higher under Republican presidents. Finally, Santa-Clara and Valkanov explore the possibility that the difference in excess returns may be localized in the period immediately before, during, and after election dates. In fact, the academic literature in political science as well as anecdotal evidence suggests that when the economy is strong, the incumbent party almost always retains ownership of the White House. "If that is the case," said Valkanov, "the incumbent would certainly have incentive to do everything possible to kick the economy into high gear right before the election. We were hoping to observe an increase in excess returns right before, during, and after the elections, due to the manipulation of economic policies." A similar difference in excess returns could also occur pre- or post-election as investors may view the weeks surrounding an election as more risky and demand higher returns from their investments. "We do not find any evidence of statistically significant abnormal returns before elections or during any other particular part of the presidency. In fact, the average excess return appears to build up slowly and gradually throughout the term," said Santa-Clara. "These results leave us with a puzzle to solve, and we will continue to look for an explanation of our findings." "We also look at which party controls Congress to determine if this is a factor in our findings," said Santa-Clara. "Surprisingly, we find no effect on the equity premium, whether Democrats or Republicans have control of the House or the Senate. -- Web: http://www.openknowledge.org/
