ScienceDirect Publication: Journal of Empirical Finance
Tue, 21 Jan 2020 18:03:32 GMT language
Publication date: Available online 20 January 2020
Source: Journal of Empirical Finance
Author(s): Oumar Sy, Ashraf Al Zaman
A hotly debated question in finance is whether the higher stock returns under Democratic presidencies relative to Republican presidencies represent abnormal return, risk premium, or mere statistical fluke. This paper investigates whether this presidential premium is due to spurious-regression bias, data mining, or economic policy uncertainty. Decomposing the presidential premium into expected and unexpected components, we find that over two-thirds of the premium is unexpected, which is inconsistent with the spurious regression bias explanation. The presidential premium is not explained by data mining given that it persists in the post-publication period, and remains robust even if we purge returns of their covariation with economic policy uncertainty.