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Partisan Politics, Interest Rates And The Stock Market: Evidence From American And British Returns In The Twentieth Century

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  • BUMBA MUKHERJEE
  • DAVID LEBLANG

Abstract

We examine the relationship between government partisanship, interest rates and the mean and volatility of stock prices in the United States and United Kingdom. We suggest that traders in the stock market rationally expect higher (lower) post‐electoral interest rates during the incumbency of the left‐wing (right‐wing) party – Democrats and Labor (Republican and Conservative) – and in election years when they expect the left‐wing (right‐wing) party to win elections. We hypothesize that expectations of higher (lower) interest rates decrease (increase) the mean and volatility of stock prices during the actual incumbency or even anticipation of a left‐wing (right‐wing) party holding the office of the chief executive. Results from empirical models estimated on data from U.S. and U.K. markets over most of the twentieth century statistically support our claims.

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  • Bumba Mukherjee & David Leblang, 2007. "Partisan Politics, Interest Rates And The Stock Market: Evidence From American And British Returns In The Twentieth Century," Economics and Politics, Wiley Blackwell, vol. 19(2), pages 135-167, July.
    • Handle: RePEc:bla:ecopol:v:19:y:2007:i:2:p:135-167
    DOI: 10.1111/j.1468-0343.2007.00306.x
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    2. Leilane de Freitas Rocha Cambara & Roberto Meurer, 2023. "News sentiment and foreign portfolio investment in Brazil," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 3332-3348, July.
    3. K. Arin & Alexander Molchanov & Otto Reich, 2013. "Politics, stock markets, and model uncertainty," Empirical Economics, Springer, vol. 45(1), pages 23-38, August.
    4. Imai, Masami & Shelton, Cameron A., 2011. "Elections and political risk: New evidence from the 2008 Taiwanese Presidential Election," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 837-849, August.
    5. Sebastián Nieto Parra & Javier Santiso, 2008. "Wall Street and Elections in Latin American Emerging Economies," OECD Development Centre Working Papers 272, OECD Publishing.
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    7. Stephen Weymouth & J. Lawrence Broz, 2013. "Government Partisanship and Property Rights: Cross-Country Firm-Level Evidence," Economics and Politics, Wiley Blackwell, vol. 25(2), pages 229-256, July.
    8. Masami Imai & Cameron A. Shelton, 2010. "Elections and Political Risk: New Evidence from Political Prediction Markets in Taiwan," Wesleyan Economics Working Papers 2010-001, Wesleyan University, Department of Economics.

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