Abstract
The effects of political risk emanating from unexpected changes in the economic policies of the US presidency are measured on a cross-section of stock portfolios. Unlike previous efforts to measure the effects of the puzzle, this paper makes use of advances in the measurement of ideology and political activity that allows measurement of political risk that is both reproducible without the use of dummy variables, and allows for finer distinctions. Surprises to the market associated with presidential policy are significant in both explaining the cross-section of returns and in minimizing pricing errors, even when controlling for other factors.
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