Political variables do not improve the performance of trading rules

Jan 21, 2009

A new study in The Financial Review provides empirical evidence on the Democratic premium and the presidential cycle effect by examining the implications of both factors on the predictability of U.S. excess stock returns.

Results show that even though political variables are often included in forecasting models, they will not help investors to systematically improve, in real-time, the performance of trading rules.

Using monthly U.S. data from 1953 to 2003, researchers analyzed the implications of political stock market anomalies for forecasting excess stock returns in real-time.

Based on widely used statistical model-selection criteria, political variables are often included in the forecasting model an investor should have used to forecast excess stock returns in real-time. The economic benefits an investor could have reaped upon using political variables to set up trading rules, however, would have been limited.

The limited success of political variables in forecasting excess stock returns also shows that political stock market anomalies, when analyzed in real time, are not necessarily an indication of market inefficiency.

The so called efficient market hypothesis is one of the cornerstones of modern finance theory. Broadly speaking, this hypthesis states that investors cannot use information on past and current financial market, macroeconomic, and political developments to outperform the market.

"Our results raise doubts as to whether the Democratic premium anomaly and the presidential cycle anomaly constitute major challenges to the efficient markets hypothesis," the authors conclude.

Source: Wiley

Explore further: US company sells out of Ebola toys

add to favorites email to friend print save as pdf

Related Stories

Comet Siding Spring whizzes past Mars

7 hours ago

A comet the size of a small mountain whizzed past Mars on Sunday, dazzling space enthusiasts with the once-in-a-million-years encounter.

Major breakthrough could help detoxify pollutants

11 hours ago

Scientists at The University of Manchester hope a major breakthrough could lead to more effective methods for detoxifying dangerous pollutants like PCBs and dioxins. The result is a culmination of 15 years of research and ...

Recommended for you

US company sells out of Ebola toys

Oct 17, 2014

They might look tasteless, but satisfied customers dub them cute and adorable. Ebola-themed toys have proved such a hit that one US-based company has sold out.

Social trust eroded in Chinese product-tampering incident

Oct 14, 2014

For about a decade, Chinese consumers weren't getting what they paid for when they purchased Wuchang, a special brand of gourmet rice that has a peculiar scent. The quality was being diluted when less expensive rice was aromatized, ...

The 2014 Nobel Prizes at a glance

Oct 13, 2014

(AP)—All winners of the 2014 Nobel Prizes have now been announced, starting with the medicine award a week ago and ending with the economics prize on Monday.

User comments : 0