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: What I learned from debating science with trolls

add to favorites email to friend print save as pdf

Related Stories

Giant tablets aimed at families

59 minutes ago

Costing a little more than an iPad but standing more than twice as tall, a new pair of giant tablets wants families to share cozier group experiences with technology.

Restaurants experimenting with pay-in-advance tickets

2 hours ago

With restaurant patrons increasingly jumping on the Internet to make reservations, some high-end eateries here and across the country are adding a new tech wrinkle: having their clientele pay for their meal in advance using ...

Recommended for you

What I learned from debating science with trolls

11 hours ago

I often like to discuss science online and I'm also rather partial to topics that promote lively discussion, such as climate change, crime statistics and (perhaps surprisingly) the big bang. This inevitably ...

Activists urge EU to scrap science advisor job

Aug 19, 2014

Nine major charities urged the European Commission on Tuesday to scrap a science advisor position it says puts too much power over sensitive policy into the hands of one person.

More to a skilled ear in music

Aug 15, 2014

The first pilot study in Australia to give musicians the skills and training to critically assess music by what they hear rather than what they see begins this month at the Sydney Conservatorium of Music.The study aims to ...

User comments : 0