Divided Government and the Stock Market

56 Pages Posted: 7 Dec 2022 Last revised: 26 Dec 2023

See all articles by Theofanis Papamichalis

Theofanis Papamichalis

University of Cambridge

Dean Ryu

Said Business School, University of Oxford

Mungo Ivor Wilson

University of Oxford - Said Business School

Date Written: November 27, 2022

Abstract

We show that during United governments, where the same political party controls all of the White House, Senate, and the House of Representatives, the U.S. stock market earns substantially higher equity premia and the U.S. economy experiences higher economic growth than during Divided governments. We refine the presidential puzzle (Pastor and Veronesi, 2020) into a Divided-Republican government puzzle since Unified-Republican presidents earn comparable or higher equity premia than Democratic presidents from either government. Small firms are severely affected by this government cycle, as evidenced by SMB difference of 7% per annum. We use close-tie election results to infer causality.

Keywords: Divided Government, Government Puzzle, Presidential Puzzle, Stock Returns, Economic Growth, September Effect

JEL Classification: D72, E32, G12, G18, N12, N42

Suggested Citation

Papamichalis, Theofanis and Ryu, Dean and Wilson, Mungo Ivor, Divided Government and the Stock Market (November 27, 2022). Available at SSRN: https://ssrn.com/abstract=4287033 or http://dx.doi.org/10.2139/ssrn.4287033

Theofanis Papamichalis (Contact Author)

University of Cambridge ( email )

Austin Robinson Building
Sidgwick Ave
Cambridge, Cambridgeshire CB3 9DD
United Kingdom

Dean Ryu

Said Business School, University of Oxford ( email )

Mungo Ivor Wilson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288914 (Phone)

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