Underreaction to Political Information and Price Momentum

Abstract

In this study, we examine whether momentum in stock prices is induced by changes in the political environment. We find that momentum profits are concentrated among politically sensitive firms and industries. From 1939 to 2016, a trading strategy with a long position in winner portfolios (industries or firms) that are politically unfavored and a short position in losers that are politically favored does not generate significant momentum profits. Furthermore, our political‐sensitivity‐based long‐short portfolio explains 23% to 27% (42% to 43%) of monthly stock (industry) momentum alphas. This explanatory power is concentrated around presidential elections, when the level of political activity is high. Collectively, our results suggest that investor underreaction to political information generates momentum in stock and industry returns.

Economic policy uncertainty and momentum

“…Our results demonstrate that the impact of EPU on momentum remains important after controlling for the macro state variables used in the literature. A recent paper by Addoum, Delikouras, Ke, and Kumar (2019) shows that momentum profits are stronger in politically sensitive firms and industries, but our paper differs from their work in that we focus on the time series variations of momentum profitability. Third, we provide an explanation for the momentum–EPU relationship and offer direct empirical support.…”

Economic Policy Uncertainty and Stock Return Momentum

“…Under-pricing of losers (winners) is observed during optimism (pessimism). As a matter of fact, politically sensitive firms experience strong momentum profits, especially during US presidential elections (Addoum et al 2019). Kelly et al (2016) find that political uncertainty is priced into equity options, and these options tend to be expensive when their contract life traces political events.…”

An Analysis of the Use of Money to Divert the Exercise of Government Power for the Wealthiest

“…For instance, large gains in shareholder value have been found to be derived by the political expenditures of corporations, as demonstrated by Ansolabehere, de Fiueiredo, and Snyder (2003), Cooper, Gulen, and Ovtchinnovkov (2010), and Hill, Kelly, Lockhart, and Van Ness (2013). High returns to stocks from the election of politicians relatively favorable to firms' operations have been found to continue over long periods of time (Addoum, Delikouras, Ke, and Kumar (2018). However, such researchers were perplexed as to the mechanics of that control enabling such high returns on expended political capital that don't seem to be consistent with capitalist theories of marginal revenues equaling marginal costs.…”