Mahurin Honors College Capstone Experience/Thesis Projects
Department
Economics
Document Type
Thesis
Abstract
The relatively high average returns on stocks are understood to be partly a function of the risk taken on by investors when investing in stocks. One source of this risk is the uncertainty regarding future government policy. This uncertainty, though, is not constant across time; it is greatest around elections, when new policies are unknown and the impact of the policies will be relatively immediate. As uncertainty resolves following the election, risk premia should decrease & prices should rise. Thus, investors who buy stocks during this period of uncertainty should be compensated with higher average returns in the months following the election. I test this hypothesis empirically, using United States election data from 1927-2015. Since political risk is a systematic risk, I attempt to quantify this risk by determining the portion of returns attributable to systematic risk both before and after the election. I find evidence that returns are higher in the post-election period, that these returns vary across companies in different industries and of different size, and that systematic risk explains a higher portion of returns in the pre-election period.
Advisor(s) or Committee Chair
Alex Lebedinsky, Ph.D.
Disciplines
Economics | Finance | Political Science
Recommended Citation
Thornhill, John, "Electing to Take on Risk: Political Uncertainty, Midterm Elections, and the Cross-Section of Stock Returns" (2022). Mahurin Honors College Capstone Experience/Thesis Projects. Paper 974.
https://digitalcommons.wku.edu/stu_hon_theses/974