Government partisanship, elections, and the stock market: Examining American and British stock returns, 1930-2000

David Leblang, Bumba Mukherjee

Research output: Contribution to journalArticle

61 Scopus citations

Abstract

We construct a model of speculative trading to examine how the mean and volatility of stock prices is affected both by government partisanship and by traders' expectations of electoral victory by the right-wing or left-wing party. Our model predicts that rational expectations of higher inflation under left-wing administrations lowers the volume of stocks traded in the stock market. The decline in trading volume leads to a decrease in the mean and volatility of stock prices not only during the incumbency of left-wing governments, but also when traders expect the left-wing party to win elections. Conversely, expectation of lower inflation under right-wing administrations leads to higher trading volume. This leads to an increase in the mean and volatility of stock prices during the tenure of right-wing governments and when traders anticipate the right-wing party to win elections. Daily and monthly data from U.S. and British equity markets between 1930 and 2000 statistically corroborate the predictions from our formal model.

Original languageEnglish (US)
Pages (from-to)780-802
Number of pages23
JournalAmerican Journal of Political Science
Volume49
Issue number4
DOIs
StatePublished - Oct 1 2005

All Science Journal Classification (ASJC) codes

  • Sociology and Political Science
  • Political Science and International Relations

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