Prior research documented that U.S. stock prices tend to grow faster during Democratic administrations than during Republican administrations. This letter examines whether stock returns in other countries also depend on the political orientation of the incumbents. An analysis of 24 stock markets and 173 different governments reveals that there are no statistically significant differences in returns between left-wing and right-wing executives. Consequently, international investment strategies based on the political orientation of countries' leadership are likely to be futile.Stock market returns; Politics; Presidential puzzle

Bialkowski, Jedrzej

Gottschalk, Katrin

Wisniewski, Tomasz

English

Research Papers in Economics

Political Orientation of Government and 
Stock Market Returns 
 
Jedrzej Bialkowski
* 
Department of Finance 
Faculty of Business 
Auckland University of Technology 
Private Bag 92006 
Auckland 1020 
New Zealand 
E-mail: jedrzej.bialkowski@aut.ac.nz 
Phone: ++64 9 921 9999-5401 
Fax: ++64 9 921 9629 
 
Katrin Gottschalk 
Department of Economics 
European University Viadrina Frankfurt (Oder) 
Große Scharrnstr. 59 
15230 Frankfurt (Oder) 
Germany 
E-mail: gottschalk@euv-ffo.de 
Phone: ++49 335 5534-2667 
Fax: ++49 335 5534-2959 
 
 Tomasz Piotr Wisniewski 
Department of Finance 
Faculty of Business 
Auckland University of Technology 
Private Bag 92006 
Auckland 1020 
New Zealand 
E-mail: tomasz.wisniewski@aut.ac.nz 
Phone: ++64 9 921 9999-5393 
Fax: ++64 9 921 9889 
 
 
* Corresponding author   1
Political Orientation of Government and 
Stock Market Returns 
 
 
 
 
Abstract 
 
Prior research documented that U.S. stock prices tend to grow faster during 
Democratic than during Republican administrations. This letter examines whether 
stock returns in other countries also depend on the political orientation of the 
incumbents. An analysis of 24 stock markets and 173 governments reveals that there 
are no statistically significant differences in returns between left-wing and right-wing 
executives. Consequently, international investment strategies based on the political 
orientation of countries’ leadership are likely to be futile. 
 
 
JEL classification: G11; G14; G15 
Keywords: Stock market returns; Politics; Presidential puzzle 
   2
I.  Introduction 
An important question faced by every voter on the Election Day is which of 
the parties is best equipped to foster the development of economy and capital 
markets. In the pursuit of their own political agenda, the winning party or coalition 
can fine-tune the fiscal policy and significantly impact on the future economic 
outcomes. Depending on their political orientation, the objectives of different camps 
can be quite disparate. As suggested by the partisan theory of Hibbs (1977), left-wing 
governments tend to cater for the well-being of their working class electorate by 
targeting unemployment. Right-wing governments, on the other hand, prioritize 
reduction in inflation so feared by the higher income and occupational status groups.  
Several earlier papers focused specifically on the relationship between 
political orientation of the executive branch of the government and stock market 
performance. Johnson et al. (1999) and Santa-Clara and Valkanov (2003) report that 
U.S. stock market returns were higher under Democratic than Republican 
presidencies, with the difference being particularly large for small stock portfolios. 
This anomaly can not be explained away by variations in business cycle proxies. 
Huang (1985) and Hensel and Ziemba (1995) look at whether presidential trading 
strategies are able to improve investors’ risk-return trade-off. 
  Our paper adds to the presidential puzzle literature by extending the empirical 
analysis beyond the U.S. stock market. The data set compiled for this study covers 24 
OECD countries and 173 governments. Since elections are relatively infrequent, a 
multi-country approach allows increasing the number of observations and the power 
of statistical tests. Furthermore, it provides useful insights to international investors 
who wonder whether the conclusions obtained from the U.S. data can be generalized 
in a global context.   3
The remainder of this letter is organized as follows. The next section 
describes data sources and sample characteristics. Section III investigates the 
behavior of stock market indices around the Election Day and throughout the tenure 
of different administrations. The implications for investors and conclusions are 
contained in the last section. 
 
II.  Data 
  In order to investigate the nexus between political variables and stock returns, 
the authors attempted to construct a comprehensive data set including all OECD 
countries. Regrettably, Iceland, Ireland, Luxembourg, Slovakia, South Korea, and 
Switzerland had to be excluded from the analysis because either MSCI did not 
provide data on stock market indices for these capital markets, or there was not a 
single change in the orientation of the government throughout the period for which 
the index was available. The returns for the remaining 24 countries were computed 
using the U.S. dollar denominated, value-weighted, and dividend-adjusted MSCI 
Country Indices spanning a period from January 1980 through December 2005. 
Whenever daily data on MSCI indices was not available from January 1980, the 
sample period was adjusted accordingly. The stock market data was sourced from 
Thomson Financial Datastream. 
The prevailing political system in a given country (presidential or 
parliamentary) determines the relevant type of election that will be examined. 
Election dates as well as the exact start and end dates of each government’s term in 
office were obtained from Banks et al. (2004), Caramani (2000), Lane et al. (1991), 
Laver and Schofield (1998), and Müller and Strøm (2000). The classification of 
governments into left- and right-leaning administrations was taken from Alesina and   4
Roubini (1992), Alt (1985), and Banks et al. (2004). Coalition governments were 
attributed to the political camp they are conventionally associated with. Table 1 
describes the characteristics of the political and financial variables used in this letter.  
[Table 1 about here] 
Over 60% of the countries had daily MSCI index data available from January 
1980, whereas in the remaining cases the index starts at a later date. Among the 24 
nations, Denmark and Australia had the highest number of governments included and 
Greece had the lowest. The data set covers a comparable number of 85 left-wing and 
88 right-wing governments. Although the number of right-wing cabinets was slightly 
higher, the left-wing governments had tenures that were on average 70 days longer. 
This translates into longer overall term in office for the left camp. 
 
III.  Results 
Abnormal Returns around the Election Day  
  One of the features of political systems is that elections do not necessarily 
coincide with an immediate change in the executive. For instance, the U.S. elections 
are always held on Tuesday following the first Monday of November, whereas the 
presidential term starts on the 20
th of January the following year. This study 
investigates the relationship between politics and stock markets by focusing both on 
the entire term of office and on the day on which voters cast their ballots.   
It is conceivable that in the face of political changes investors adjust their 
required risk premium on assets. If they attribute greater uncertainty to the left of the 
political scene, the stock market will be expected to offer higher returns under left-
wing incumbencies. The higher returns would be a form of compensation for the   5
increased risk. In this scenario, however, the prices on the Election Day are likely to 
plummet. This is an immediate consequence of the increased discount rate and the 
resultant lower present value of future cash flows of all firms. The story of changing 
risk premia is consistent with the previously discussed presidential puzzle and Riley 
and Luksetich (1980) findings showing the existence of negative returns around the 
Election Day for Democratic victories and positive returns for Republican wins. 
[Figure 1 about here] 
In its first step, this analysis examines international stock market patterns 
around the Election Day using a simple event study. The abnormal returns are 
defined as difference between the returns on the respective MSCI Country Index and 
the MSCI World Index. Figure 1 depicts the cumulative abnormal returns separated 
by orientation of the election winner. The plots show no apparent market reaction 
around the day when the uncertainty about future political leadership is resolved. The 
cumulative abnormal returns for the right-wing and left-wing election winners 
oscillate within a narrow range and fail to reach statistical significance. 
Consequently, the conclusion that investors re-adjust their discount rates in response 
to election results is not supported in our data. It is also unlikely that highly 
profitable trading strategies based on the predictions of election outcomes can be 
designed.  
Returns during the Term of Office 
  Having established that the announcement effect around elections is 
negligible, our focus turns to measuring stock market performance throughout 
different incumbencies. Table 2 presents the dollar-denominated annualized returns 
corresponding to calendar years of tenure. The second column shows mean returns   6
under left-wing rules and is juxtaposed with the third column which reports similar 
statistics for the right-wing governments. A bootstrap test based on 1,000 replications 
is used to verify whether the difference between these two columns is equal to zero.  
[Table 2 about here] 
  According to Table 2, the Democrat premium in the U.S. is around 7.7% per 
annum, which is in line with the findings of previous studies using value-weighted 
indices (see Huang (1985), Johnson et al. (1999), and Santa-Clara and Valkanov 
(2003)). The U.S. experience does not, however, generalize in the global context. A 
closer inspection reveals that 14 out of the 24 considered stock markets actually 
offered a right-wing government premium. Out of the five cases with bootstrap p-
value below 10%, two favored right-wing governments and three favored the 
political left. Overall, the stock market returns were 34 basis points higher when the 
left-wing cabinets were in power, but this result is not statistically significant. In light 
of these findings, international investors should exercise a great deal of caution 
whenever speculating on the orientation of the executive. 
 
IV.  Conclusions 
Several earlier papers noted that U.S. stock prices tend to grow faster when 
Democrats are in office. This anomaly persisted for almost a century and 
opportunities to exploit it in security trading were present. Since political orientation 
of the incumbent president is common knowledge, this result may prima facie appear 
as a violation of the Efficient Market Hypothesis. Alternatively, it may be interpreted 
as an increased risk premium accruing to investors who decide to hold stocks 
throughout the tenure of left-wing administrations. If the latter explanation was   7
correct, one would expect high returns during left-wing rules not only in the U.S., but 
also in other countries.  
To verify the above-mentioned hypothesis, this study used a comprehensive 
database covering 24 OECD countries and 173 governments. The results based on 
the international sample indicate that there are no statistically significant differences 
in returns between left-wing and right-wing governments neither in the election 
period nor throughout the tenure. The anomaly observed in the U.S. appears to be 
country-specific and investors who diversify their portfolios internationally should be 
wary of allocating their money based solely on the political orientation of the 
countries’ leadership.  
   8
References 
Alesina, A., Roubini, N., 1992. Political cycles in OECD economies. Review of 
Economic Studies, 59, 663–688. 
Alt, J.E., 1985. Political parties, world demand, and unemployment: domestic and 
international sources of economic activity. American Political Science Review, 79, 
1016–1040. 
Banks, A.S., Muller, T.C., Overstreet, W.R. (Eds.), 2004. Political Handbook of the 
World 2000-2002. CQ Press, Washington DC. 
Caramani, D., 2000. The Societies of Europe: Elections in Western Europe since 
1815 – Electoral Results by Constituencies. Palgrave Macmillan, Basingstoke, UK. 
Hensel, C.R., Ziemba, W.T. 1995, United States Investment Returns during 
Democratic and Republican Administrations, 1928-1993, Financial Analysts 
Journal, March-April, 61–69. 
Hibbs, D.A. Jr., 1977. Political Parties and Macroeconomic Policy, American 
Political Science Review, 71, 1467–1487. 
Huang, R.D., 1985. Common Stock Returns and Presidential Elections, Financial 
Analysts Journal, March-April, 58–61. 
Johnson, R.R., Chittenden, W. Jensen, G., 1999. Presidential Politics, Stocks, Bonds, 
Bills and Inflation, Journal of Portfolio Management, 26, Fall, 27–31. 
Lane, J.-E., McKay, D.H., Newton, K., 1991. Political Data Handbook: OECD 
Countries. Oxford University Press, Oxford. 
Laver, M., Schofield, N., 1998. Multiparty Government: The Politics of Coalition in 
Europe. University of Michigan Press, Ann Arbor. 
Müller, W.C., Strøm, K. (Eds.), 2000. Coalition Governments in Western Europe. 
Oxford University Press, Oxford. 
Riley, W.B., Luksetich, W.A., 1980. The Market Prefers Republicans: Myth or 
Reality, Journal of Financial and Quantitative Analysis, 15, 541–560. 
Santa-Clara, P., Valkanov, R., 2003. The Presidential Puzzle: Political Cycles and 
the Stock Market, Journal of Finance, 58, 1841–1872.   9
Figure 1: 
Cumulative Abnormal Returns around the Election Day 
 
Note: This figure depicts cumulative abnormal returns around the Election Day (Day 0) for right-wing 
and left-wing government wins. In instances where elections took place during the weekend, Day 0 is 
defined as the first day of trading after the elections. Abnormal returns are calculated as the difference 
between the return on the respective MSCI Country Index and the MSCI World Index. They are 
subsequently averaged across all relevant events and cumulated over time to obtain the cumulative 
abnormal return.    10
Table 1: 
Sample Description 
Country  MSCI index 
starting date 
Number of 
left-wing 
governments 
Number of 
right-wing 
governments 
Number of days 
left-wing 
government  
in office 
Number of days 
right-wing 
government  
in office 
Australia  1-Jan-80  5  6  4,749  4,382 
Austria  1-Jan-80  6  2  7,339  1,792 
Belgium  1-Jan-80  2  6  1,999  7,132 
Canada  1-Jan-80  5  3  5,734  3,397 
Czech Republic  30-Dec-94  2  2  2,359  1,295 
Denmark  1-Jan-80  5  6  4,211  4,920 
Finland  1-Jan-87  5  1  5,126  1,448 
France  1-Jan-80  4  4  5,346  3,785 
Germany  1-Jan-80  4  5  3,261  5,870 
Greece  1-Jun-01  1  1  1,013  296 
Hungary  2-Jan-95  2  1  2,230  1,421 
Italy  1-Jan-80  6  3  7,487  1,644 
Japan  2-Jan-80  1  9  885  8,245 
Mexico  1-Jan-88  3  1  4,718  1,491 
Netherlands  1-Jan-80  2  7  2,891  6,240 
New Zealand  2-Jan-87  4  3  3,248  3,325 
Norway  1-Jan-80  5  5  5,029  4,102 
Poland  1-Jan-93  2  2  2,635  1,747 
Portugal  4-Jan-88  2  3  2,350  3,856 
Spain  1-Jan-80  5  3  5,161  3,970 
Sweden  1-Jan-80  6  2  7,021  2,110 
Turkey  4-Jan-88  2  4  1,407  4,799 
United Kingdom  1-Jan-80  3  4  2,800  6,331 
United States  1-Jan-80  3  5  3,307  5,824 
Overall           85          88         92,306           89,422 
Note: The first column lists all of the 24 OECD countries included in the sample. The dates from which daily 
stock prices for the respective MSCI Country Indices became available in Datastream are shown in the second 
column. For any given country, the number of left-wing and right-wing governments that were in office 
between the index start date and the end of 2005 are indicated, as well as the overall number of days 
corresponding to the tenures of either political camp.    11
Table 2: 
Political Orientation of Government and Stock Market Returns 
Returns [%] 
Country  Left- 
Wing 
Right- 
Wing  Difference  Bootstrap 
p-value 
Australia  11.0897    2.0911     8.9986  0.1140 
Austria    4.5204  19.4968  -14.9764  0.0490
** 
Belgium    2.3024    9.8324    -7.5300  0.2060 
Canada    5.6661    7.7861    -2.1200  0.3680 
Czech Republic  18.1543   -3.9685   22.1228  0.0730
* 
Denmark   -0.8029  13.3258  -14.1287  0.1090 
Finland    9.9560  12.9370    -2.9810  0.4440 
France  13.4530    1.5492   11.9038  0.0690
* 
Germany   -4.1297  14.1892  -18.3189  0.0160
** 
Greece    3.1633  31.0425  -27.8792  0.1480 
Hungary  33.4150   -5.9310   39.3460  0.0190
** 
Italy  10.9697    2.9079     8.0618  0.2260 
Japan    0.4352    7.9392    -7.5041  0.2690 
Mexico  20.1139  13.8611     6.2528  0.3610 
Netherlands    4.9962  11.1087    -6.1125  0.2330 
New Zealand   -3.9651    3.0679    -7.0330  0.2460 
Norway    3.3169    9.9913    -6.6744  0.2020 
Poland    8.0489  28.1800  -20.1311  0.1690 
Portugal    4.5779    0.3350     4.2429  0.3320 
Spain  12.4139    3.0942     9.3197  0.1270 
Sweden  15.0895    9.7092     5.3803  0.3030 
Turkey    0.9501    8.2212    -7.2711  0.3670 
United Kingdom    3.1467  10.6031    -7.4564  0.1490 
United States  13.9556    6.2568     7.6988  0.1230 
Overall    8.6992    8.3588     0.3404  0.5580 
Note: The first column lists all of the 24 countries included in our sample. The next two 
columns report annualized dollar-denominated average stock market returns during the 
tenure of left-wing and right-wing governments. Column 4 shows the difference 
between the two estimates. The last column lists the bootstrap p-values for the null 
hypotheses that the differences in column 4 equal zero. The bootstrap procedure was 
performed as follows. For a single bootstrap, sample returns were drawn at random with 
replacement to match the number of days in office for the left-wing and right-wing 
governments in our original sample. Subsequently, the annualized average returns for 
both camps were computed and the difference was recorded. This procedure was 
repeated 1,000 times to develop an empirical distribution for the difference under the 
null and the p-value was extracted from this distribution.  

Coalition Governments in Western Europe.

Multiparty Government: The Politics of Coalition in Europe.

Political cycles in OECD economies.

Political Data Handbook: OECD Countries.

Political Parties and Macroeconomic Policy,

Political parties, world demand, and unemployment: domestic and international sources of economic activity.

The Market Prefers Republicans: Myth or Reality,

The Presidential Puzzle: Political Cycles and the Stock Market,

The Societies of Europe: Elections

United States Investment Returns during Democratic and Republican Administrations,

Political orientation of government and stock market returns

Political orientation of government and stock market returns

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