Abstract
In this paper, we have tested the existence of a causal relationship between the arrival of the 45th presidency of United States and the performance of American stock markets by using a relatively novel methodology, namely the causal-impact Bayesian approach. In effect, we have found strong causal relationships which, in addition to satisfying the classical Granger Causality linear test, have been quantified in absolute and relative terms. Our findings should be included in the context of one of the main markets anomalies, the so-called “calendar effects”. More specifically, when distinguishing between the subperiods of pre- and post-intervention, data confirm that the “US presidential cycle” represents a process of high uncertainty and volatility in which the behavior of the prices of financial assets refutes the Efficient-Market Hypothesis.
Highlights
The idea of linking political events to the performance of financial assets is quite old: it can already be found in Penso de la Vega (1688), which can be historically considered as the first work in analyzing the behavior of financial markets
Our empirical results are in all cases quite similar, showing a “reaction” of financial markets to the announcement of the future economic policies derived from the Trump Administration
By using an almost unprecedented methodology in the field of finance, it has been empirically demonstrated, in line with Hirsch and Hirsch (2010), that the latest US presidency exhibits one of these effects (United States presidential election cycle), caused by the doubts and uncertainties among investors related to the economic policy measures which the new administration will take and, to what extent it will carry out its electoral promises focused on fiscal, labor and foreign trade policies (Wagner et al, 2017, 2018a,b)
Summary
The idea of linking political events to the performance of financial assets is quite old: it can already be found in Penso de la Vega (1688), which can be historically considered as the first work in analyzing the behavior of financial markets. This paper describes a series of alternative and unpredictable guidelines, assimilable to the current conceptualization of bull and bear markets which, according to Goetzmann (1993), have been consecutively repeated over the last three hundred years These generic patterns are clearly linked to certain environmental factors such as political changes which usually give rise to behavioral biases in the process of decision-making by investors, which should be analyzed by taking into account the transcendental importance of psychological factors in financial decision-making (see, e.g., Muradoglu and Harvey, 2012).
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