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Political sentiment and predictable returns
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Addoum, Jawad M. and Kumar, Alok (2016) Political sentiment and predictable returns. Review of Financial Studies, 29 (12). pp. 3471-3518. doi:10.1093/rfs/hhw066 ISSN 0893-9454.
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Official URL: http://dx.doi.org/10.1093/rfs/hhw066
Abstract
This study shows that shifts in political climate influence stock prices. As the party in power changes, there are systematic changes in the industry-level composition of investor portfolios, which weaken arbitrage forces and generate predictable patterns in industry returns. A trading strategy that attempts to exploit demand-based return predictability generates an annualized risk-adjusted performance of 6% during the 1939 to 2011 period. This evidence of predictability spans 17%-27% of the market and is stronger during periods of political transition. Our demand-based predictability pattern is distinct from cash flow-based predictability identified in the recent literature.
Item Type: | Journal Article | ||||||||
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Divisions: | Faculty of Social Sciences > Warwick Business School | ||||||||
Journal or Publication Title: | Review of Financial Studies | ||||||||
Publisher: | Oxford University Press | ||||||||
ISSN: | 0893-9454 | ||||||||
Official Date: | December 2016 | ||||||||
Dates: |
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Volume: | 29 | ||||||||
Number: | 12 | ||||||||
Page Range: | pp. 3471-3518 | ||||||||
DOI: | 10.1093/rfs/hhw066 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access |
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