Alternative estimates of the presidential premium
By: Sean D. Campbell and Canlin Li.
Contributors: Li, Canlin.
Series: Finance and economics discussion series ;; 2004-69; Finance and economics discussion series (Online) ;; 2004-69.
Publisher: Federal Reserve Board
Published: 2004
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
Description: "Since the early 1980s much research, including the most recent contribution of Santa-Clara and Valkanov (2003), has concluded that there is a stable, robust and significant relationship between Democratic presidential administrations and robust stock returns.  Moreover, the difference in returns does not appear to be accompanied by any significant differences in risk across the presidential cycle.  These conclusions are largely based on OLS estimates of the difference in returns across the presidential cycle.  We re-examine this issue using more efficient estimators of the presidential premium.  Specifically, we exploit the considerable and persistent heteroskedasticity in stock returns to construct more efficient weighted least squares (WLS) and generalized autoregressive conditional heteroskedasticity (GARCH) estimators of the difference in expected excess stock returns across the presidential cycle.  Our findings provide considerable contrast to the findings of previous research.  Across the different WLS and GARCH estimates we find that the point estimates are considerably smaller than the OLS estimates and fluctuate considerably across different sub samples.  We show that the large difference between the WLS, GARCH and OLS estimates is driven by differing stock market performance during very volatile market environments.  During periods of elevated market volatility, excess stock returns have been markedly higher under Democratic than Republican administrations.  Accordingly, the WLS and GARCH estimators are less sensitive to these episodes than the OLS estimator.  Ultimately, these results are consistent with the conclusion that neither risk nor return varies significantly across the presidential cycle"--Federal Reserve Board web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 1/4/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.