The Presidential Puzzle

Does the stock market perform better during Republican or Democratic presidencies? Do certain firms or industry segments systematically underperform or outperform during a certain political regime? Why? The goal of this project is to examine the relationship between political cycles and the stock market.




Write a short report (not more than 5 pages, double-spaced) to include the following:


  1. Use stock market data to examine the stock market performance during Republican and Democratic presidencies. Report the raw as well as the risk-adjusted performance of the stock market during the Republican and Democratic presidencies. Also, compute the risk measures to determine whether risk differences can explain the differences in the performance.
  2. Provide a brief discussion of your empirical findings. 
  4. Please explain the pattern you observe and provide some conjectures for why these patterns exist. It would be useful if you can provide evidence (even anecdotal) to support your arguments. Also, please explain whether you think the results you find are economically meaningful and why.
  6. Are there certain types of firms or industries that are more likely to be sensitive to political cycles? Why? Would the returns of those firms be higher or lower during a Democratic presidency? Please provide evidence (even anecdotal) to support your conjectures.
  8. Can investors take advantage of the opportunity that you have identified? Why or why not?
  10. Why don’t arbitrageurs exploit this opportunity? What are some reasons that may limit the role of arbitrageurs?

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