Investor sentiment and the variance risk premium are well-established learning-based
predictors of aggregate stock market returns. This study investigates whether the return
predictability of investor sentiment and the variance risk premium is impacted by the quality
of political signals. Our analysis shows that low-quality political signals substantially weaken
return predictability via a prolonged mispricing correction associated with lower market
participation. The explanatory power of predictive regression models is significantly improved
when a proxy for the quality of political signals is included. Overall, our robust findings provide
evidence that low-quality political signals have a negative impact on the functioning of
financial markets
