Selecting the portfolio investment strategy under political structure change in United States

Abstract

This paper investigated whether stock market returns and volatilities were induced by change of long-term political structure. The empirical study finds that the political change is a crucial variable to DJIA and S&P 500 stock returns, but is insignificant to volatilities. But after the 1987 Crash, the political change has a positive effect on DJIA stock returns, and reduced the risk of DJIA and S&P 500. When political structure change, significant economic policies must submit to political realities and those proposed by previous governments often do not get implemented, resulting in market confusion. But following the increasing the consummation of market structure during post-1987 crash, hence, the political change effect increased DJIA stock returns, and reduced the risk of DJIA and S&P 500, and therefore the investors might be able to make a profit when they took active portfolio positions of DJIA.