Politics and the stock market: Evidence from Germany

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in __________________________________________________________________ AbstractWe analyze the interaction of stock market movements and politics in Germany. In contrast to the empirical evidence available for the U.S., we do not find that German stock market returns tend to be higher during liberal than during conservative governments. Also in contrast to results for the U.S., we find no evidence for an election cycle in German stock market returns. However, estimated popularity functions and VARs suggest that stock market returns have had an impact on the popularity of German governments. We find that this result is robust across different VAR specifications and time periods.

Is there a link between politics and stock returns? A literature survey

“…Since it has been long established that people's voting behavior is influenced by past economic performance (Fair 1978;1996), it is also conceivable that incumbents could be held accountable for changes in prices of common equity. Döpke and Pierdzioch (2006) document that this is indeed the case in Germany, where the government's popularity seems to be driven by excess stock returns. Similarly, using US data going back as far as 1824, Prechter et al (2012) show that an incumbent's popular vote margin in presidential reelection bids is strongly related to past net returns on the stock market index.…”

“…Evidence from short periods around the British general elections seems to indicate that the market prefers the rightist Conservative Party (Herron, 2000;Hudson et al, 1998;Gemmil, 1992), however when looking at the returns during the entire period in office, there appears to be no significant difference in nominal or real returns across Conservative and Labour governments (Hudson et al, 1998). Füss and Bechtel (2008) show that, during the 2002 German federal elections, returns on small stock were positively related to the probability of a right-leaning coalition victory, while Döpke and Pierdzioch (2006) argue that, in general, German stock returns tended to be marginally higher under right-wing than left-wing governments. Bialkowski et al (2007) use a comprehensive sample of 24 OECD countries to investigate the influence of political orientation of the executive on local stock market fluctuations.…”

“…By looking at UK data, Hudson et al (1998) conclude that neither the Labour nor the Tory party were able to generate significantly greater stock price increases prior to elections. This is the Post review, final submitted author manuscript accepted in International Review of Financial Analysis 2016 Döpke and Pierdzioch (2006) fail to find an overwhelming evidence of the election cycle in German stock returns. Bohl and Gottschalk (2006) use a comprehensive sample of 15 countries and discover that only in three of them were returns significantly higher in the second half of a government term.…”

Does Economic Policy Uncertainty Drive CDS Spreads?

“…This return gap allows investors to design profitable trading strategies based on this anomaly (Hensel and Ziemba, 1995). While these results appear to be convincing in the US context, they are not easily generalizable to other nations (Cahan et al, 2005;Bohl and Gottschalk, 2006;Döpke and Pierdzioch, 2006;Bialkowski et al, 2007).…”

Voting and the economic cycle

“…Given the wide dispersion in economic performance it is clear that social infrastructure cannot be taken for granted and extending this view to a model of rational voting means that improved trend growth will be rewarded at the polls. Relatedly, Döpke and Pierdzioch (2006) and Fauvelle-Aymar and Stegmaier (2013) both …nd that incumbent approval is related to the stock market over and above economic control variables. In principle, the stock market index represents market expectations of the future potential output levels, hence there could be a correspondence with the trend component of output.…”