Political uncertainty, market anomalies and Presidential honeymoons

Abstract

The first 100 days of a newly-elected President's administration are often a period of substantial and concentrated policy change. This paper shows that measures of uncertainty and risk aversion rise sharply during Presidential honeymoons. Consistent with theoretical models that suggest that investors demand compensation for bearing heightened political risk, we document striking spread returns to value, investment and profitability anomalies during honeymoons. For example, the book-to-market value premium averages 3.51% per month during Presidential honeymoons, yet only 0.27% per month at other times. These findings survive numerous robustness checks. Nonetheless, establishing a direct link between escalating political risk and equity returns proves challenging.