Divided government and stock returns

Working paper

We document that unified US governments are associated with higher annual excess and real stock return than divided US governments. For the value-weighted portfolio the difference is 9.95% and for the equal-weighted 18.37%. These results are statistically and economically significant and robust in subsamples. Interestingly, corresponding differences in volatility fail to give a justification for the difference in returns compensation for risk as they go in the opposite direction. Similar results are obtained for real GDP growth rates. In particular, average annual real GDP growth for unified and divided governments are 3.70% and 2.34% respectively.

Authors: Wilson, M; Papamichalis, T

• Publication status: Published
• Publication date: 2021-02-08
• Language: English
• Keywords: presidential puzzle; growth; stock returns; unified government