THE "PRESIDENTIAL-ELECTION CYCLE" IN THE STOCK MARKET (INVESTMENTS, EFFICIENCY)
Abstract
This thesis is primarily an empirical study regarding the existence of a four-year cycle in the stock market that is related to the presidential elections. Such a cycle has been widely considered by investment practitioners in recent years. Its existence would have serious implications, not only for investment decisions, but for market efficiency and academic research as well. However, this study also considers the turn-of-the-year and small-firm effects. Their existence, as well as their relationship with the four-year cycle, are also examined. The data examined consisted mainly of aggregate measures of the stock market. However, data from several different industry groups are also analyzed. Thus, the four-year cycle, and the turn-of-the-year and small-firm effects, are not only considered for the whole market, but several sub-groups are examined as well. The purpose of this is to determine whether the cycle, and these effects, follow the same pattern in these industries as in the market as a whole. Both parametric and nonparametric tests, as well as spectral analysis, were used. The results, in general, were consistent under all methodologies. A four-year cycle that could be related to the presidential elections was found to exist in the stock market since 1961. The form of this cycle is such that common stocks tend to provide higher returns the last two years of a president's term in office than the first two years. The presence of this cycle was found, not only in aggregate measures of the stock market, but in its subdivisions as well. We also found evidence, both for the whole market and its subdivisions, that shows that small companies have been providing returns that are consistently higher in the month of January than in the rest of the year. Finally, it was determined that this cycle, and these effects, could have been profitably exploited. Thus, this study provides evidence that contradicts even the weak form of market efficiency.
Degree
Ph.D.
Subject Area
Finance
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