Abstract
The midterm election effect is one of the most persistent regularities related to US politics reported in empirical finance, but it has also been one of the least examined. We explore practical implications for investors, analysing monthly excess and risk-adjusted returns on 49 industry portfolios for the period 1926–2022. Contrary to much commentary in the professional media and prior literature, higher returns around midterm elections all but disappear after returns are adjusted for risk. We also find that midterm elections are predominantly associated with the market factor, and thus, higher returns appear to merely compensate investors for bearing risk.
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