Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

Equity Premiums in the Presidential Cycle: Analyzing the Midterm Election Resolution of Uncertainty

Last Updated on 10 February, 2024 by Rejaul Karim

In “Equity Premiums in the Presidential Cycle: the Midterm Election Resolution of Uncertainty,” Kam Fong Chan and Terry Marsh delve into the intriguing relationship between political uncertainty and equity premiums over the U.S. Presidential election cycle.

The authors analyze the shifts in uncertainty and equity premiums, uncovering a surprising pattern: midterm elections are linked to the highest pre-election increases in uncertainty, subsequently leading to elevated equity premiums post-midterm as policy uncertainty and ex ante risk premiums diminish. This phenomenon has persisted across federal elections spanning two centuries.

The paper highlights the compensation for political uncertainty, primarily measured using the Economic Policy Uncertainty index, through higher premiums. Additionally, the authors observe the reappearance of the “lost CAPM” for expected equity returns during the post-midterm period, indicating a fitting of returns amidst the influx of public information.
Furthermore, the paper sheds light on the disappearance of the idiosyncratic volatility and lottery-demand puzzles in post-midterm months, offering valuable insights into the dynamics of equity markets within the Presidential cycle.

Abstract Of Paper

We analyze shifts in political uncertainty and equity premiums over the U.S. Presidential election cycle. Somewhat ironically, it is midterm elections that turn out to be associated with the highest pre-election increases in uncertainty, leading to higher equity premiums post-midterm as the policy uncertainty and ex ante risk premiums decrease. We show this to have been the case for federal elections held over the past two centuries. We argue that the political uncertainty, which we measure primarily by the Economic Policy Uncertainty index, tends to be a tail risk that has previously been found to be compensated by higher premiums. We also find that the “lost CAPM” for expected equity returns reappears to fit returns amidst the post-midterm flood of public information, but not at other times in the Presidential cycle. We further show that the idiosyncratic volatility and lottery-demand puzzles disappear in post-midterm months.

Original paper – Download PDF

Here you can download the PDF and original paper of Equity Premiums in the Presidential Cycle: the Midterm Election Resolution of Uncertainty.

(An option to download will come shortly)

Author

Kam Fong Chan
The University of Western Australia; Financial Research Network (FIRN)

Terry Marsh
Quantal International Inc.

Conclusion

In conclusion, Kam Fong Chan and Terry Marsh’s “Equity Premiums in the Presidential Cycle: the Midterm Election Resolution of Uncertainty” offers valuable insights into the relationship between political uncertainty and equity premiums over the U.S. Presidential election cycle.

The authors reveal a fascinating pattern, where midterm elections are associated with the highest pre-election increases in uncertainty, leading to elevated equity premiums post-midterm, as policy uncertainty and ex ante risk premiums decrease. This trend has been observed consistently across federal elections held over the past two centuries.

The paper highlights the compensation for political uncertainty through higher premiums, primarily measured using the Economic Policy Uncertainty index. Additionally, the reappearance of the “lost CAPM” for expected equity returns during the post-midterm period indicates a fitting of returns amidst the influx of public information.

Moreover, the paper sheds light on the disappearance of the idiosyncratic volatility and lottery-demand puzzles in post-midterm months. Overall, this paper provides a compelling analysis of the dynamics of equity markets within the Presidential cycle and offers valuable insights for investors and policymakers alike.

Related Reading:

Measuring Skewness Premia

Risk Neutral Skewness Predicts Price Rebounds and so can Improve Momentum Performance

FAQ

What is the main focus of the research paper “Equity Premiums in the Presidential Cycle: the Midterm Election Resolution of Uncertainty” by Kam Fong Chan and Terry Marsh?

The research paper analyzes the relationship between political uncertainty and equity premiums over the U.S. Presidential election cycle. The authors specifically focus on the shifts in uncertainty and equity premiums, revealing a surprising pattern associated with midterm elections.

What is the key pattern observed in the paper regarding political uncertainty and equity premiums during the Presidential election cycle?

The paper uncovers a pattern where midterm elections are linked to the highest pre-election increases in uncertainty. This, in turn, leads to elevated equity premiums post-midterm as policy uncertainty and ex ante risk premiums decrease. The observed pattern has persisted across federal elections held over the past two centuries.

How is political uncertainty measured in the study, and what role does it play in the dynamics of equity premiums?

Political uncertainty is primarily measured using the Economic Policy Uncertainty index. The paper argues that political uncertainty tends to be a tail risk that is compensated by higher premiums. The compensation for political uncertainty is reflected in higher equity premiums, and this relationship is explored in the context of the Presidential election cycle.

Find A Comprehensive Database of Research Papers On Trading Strategies here

Leave a Reply

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password