Presidential economic approval rating and the cross-section of stock returns

Zilin Chen; Zhi Da; Dashan Huang; Liyao Wang

doi:10.1016/j.jfineco.2022.10.004

Presidential economic approval rating and the cross-section of stock returns

Zilin Chen, Zhi Da, Dashan Huang^*, Liyao Wang

^*Corresponding author for this work

Research output: Contribution to journal › Journal article › peer-review

17 Citations (Scopus)

Abstract

We construct a monthly presidential economic approval rating (PEAR) index from 1981 to 2019, by averaging ratings on the president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those with low betas by 1.00% per month in the future, on a risk-adjusted basis. The low PEAR beta premium persists up to one year, and is present in various sub-samples and even in other G7 countries. PEAR beta dynamically reveals a firm’s perceived alignment to the incumbent president’s economic policies and investors seem to misprice such an alignment.

Original language	English
Pages (from-to)	106-131
Number of pages	26
Journal	Journal of Financial Economics
Volume	147
Issue number	1
Early online date	7 Nov 2022
DOIs	https://doi.org/10.1016/j.jfineco.2022.10.004
Publication status	Published - Jan 2023

User-Defined Keywords

Political cycle
Presidential economic approval rating
Presidential job approval rating
Presidential puzzle
Sentiment

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10.1016/j.jfineco.2022.10.004

Cite this

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title = "Presidential economic approval rating and the cross-section of stock returns",

abstract = "We construct a monthly presidential economic approval rating (PEAR) index from 1981 to 2019, by averaging ratings on the president{\textquoteright}s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those with low betas by 1.00% per month in the future, on a risk-adjusted basis. The low PEAR beta premium persists up to one year, and is present in various sub-samples and even in other G7 countries. PEAR beta dynamically reveals a firm{\textquoteright}s perceived alignment to the incumbent president{\textquoteright}s economic policies and investors seem to misprice such an alignment.",

keywords = "Political cycle, Presidential economic approval rating, Presidential job approval rating, Presidential puzzle, Sentiment",

author = "Zilin Chen and Zhi Da and Dashan Huang and Liyao Wang",

note = "Funding information: Zhi Da acknowledges financial support from Beijing Outstanding Young Scientist Program (BJJWZYJH01201910034034) and the 111 Project (B20094). Dashan Huang acknowledges that this study was written with support from the ASEAN Business Research Initiative (ABRI) grant # G17C204018. Publisher copyright: {\textcopyright} 2022 Elsevier B.V.",

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language = "English",

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AU - Chen, Zilin

AU - Da, Zhi

AU - Huang, Dashan

AU - Wang, Liyao

N1 - Funding information: Zhi Da acknowledges financial support from Beijing Outstanding Young Scientist Program (BJJWZYJH01201910034034) and the 111 Project (B20094). Dashan Huang acknowledges that this study was written with support from the ASEAN Business Research Initiative (ABRI) grant # G17C204018. Publisher copyright: © 2022 Elsevier B.V.

PY - 2023/1

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N2 - We construct a monthly presidential economic approval rating (PEAR) index from 1981 to 2019, by averaging ratings on the president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those with low betas by 1.00% per month in the future, on a risk-adjusted basis. The low PEAR beta premium persists up to one year, and is present in various sub-samples and even in other G7 countries. PEAR beta dynamically reveals a firm’s perceived alignment to the incumbent president’s economic policies and investors seem to misprice such an alignment.

AB - We construct a monthly presidential economic approval rating (PEAR) index from 1981 to 2019, by averaging ratings on the president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those with low betas by 1.00% per month in the future, on a risk-adjusted basis. The low PEAR beta premium persists up to one year, and is present in various sub-samples and even in other G7 countries. PEAR beta dynamically reveals a firm’s perceived alignment to the incumbent president’s economic policies and investors seem to misprice such an alignment.

KW - Political cycle

KW - Presidential economic approval rating

KW - Presidential job approval rating

KW - Presidential puzzle

KW - Sentiment

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DO - 10.1016/j.jfineco.2022.10.004

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JO - Journal of Financial Economics

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Presidential economic approval rating and the cross-section of stock returns

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