Political Cycles, Investor Sentiment, and Stock Market Returns

Frederick Adjei^1, and Mavis Adjei²

¹Economics and Finance Department, Southeast Missouri State University, Cape Girardeau, USA

²Marketing Department, Southern Illinois University Carbondale, Carbondale, USA

Cite this paper:
Frederick Adjei and Mavis Adjei. Political Cycles, Investor Sentiment, and Stock Market Returns. Journal of Finance and Economics. 2017; 5(1):1-10. doi: 10.12691/jfe-5-1-1

Abstract

In this study, we examine the relationships among political cycles, investor sentiment, and stock market returns. We uncover that the variable: change in investor sentiment levels, is a mediator for the relationship between political cycles and stock market returns. We establish that political cycles impact stock market returns through two channels. First, there is a direct impact of fiscal and regulatory policies on corporate fundamentals which is reflected in stock prices, and second, there is an indirect impact through the change in investor sentiment levels which in turn impacts stock prices. Additionally, we empirically examine the relationship between presidential elections cycles and investor sentiment, and find that investor sentiment levels are lower and improve during Democratic presidential terms and are higher and decline during Republican presidential terms.

Keywords:
political cycles investor sentiment stock market returns

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