The Short-term effects of US elections on the Stock Market
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Date
2019-05
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The Ohio State University
Abstract
According to Efficient Market Hypothesis, asset prices fully reflect all available information in the stock market. The potential risks and market uncertainty, such as interest rates, inflation and unemployment, can affect investment strategy. Focusing on political risk, investors believe that the control of government can hurt or benefit the whole market in both the short and long term. In the paper "Political Elections and the Resolution of Uncertainty: the International Evidence", Pantzails, Stangeland and Turtle collected data from election dates for 33 countries in the period 1955-1974. They found that there is a positive market reaction in the two weeks preceding political elections, and, when the uncertainty is resolved, there is a corresponding increase in equity prices. I decided to test if election uncertainty can influence stock market volatility, and if there is an abnormal return one month before and after the election date. My study chooses the election dates for both the General Presidential election and Midterm election from 1940 to 2018, collecting the total monthly return data (S&P 500 INDEX) from Bloomberg dataset. The main hypothesis of this paper is that because of the accurate predictions and polling before Presidential election years, the uncertainty of election is not a big influential factor that can lead Abnormal Return or increase the volatility of the market. However, different parties and the consistence of President and Congress can make the market react differently.