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The midterm election effect on US stock returns: Some practical considerations for investors

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Abstract

The midterm election effect is one of the most persistent regularities related to US politics reported in empirical finance, but it has also been one of the least examined. We explore practical implications for investors who would like to benefit from the effect. First, we draw lessons from an analysis of 49 industry portfolios, using monthly excess and risk-adjusted returns for the period 1926-2022. Contrary to much commentary in the professional media and prior literature, higher returns around midterm elections all but disappear after returns are adjusted for risk. Second, we find that midterm elections are predominantly associated with the market factor and thus, higher returns appear to merely compensate investors for bearing risk.

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  • Warwick Anderson & Jędrzej Białkowski & Moritz Wagner, 2023. "The midterm election effect on US stock returns: Some practical considerations for investors," Working Papers in Economics 23/05, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:23/05
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    More about this item

    Keywords

    Midterm election; political cycle; political uncertainty; industry returns; benchmark returns;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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