The Government Legislative Index and Stock Market Outcomes

Yosef Bonaparte, R. Christie-David
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Abstract

We compose a Government Certainty Index (GCX), which measures a government’s ability to execute its own policy; encompass president seniority, political capital, and calculus. We show that GCX co-moves positively with stock market performance and negatively (mostly) with stock market volatility (for high GCX). The intuition of our finding is driven from the asset pricing behavioral and risk prospective: stronger government reflects consensus of the people; thus investors overreact to strong leadership and prices go up (return); and a stronger government provides clarity and less uncertainty (risk). We find that the effect of GCX varies across sectors and deciles, and on average, GCX is higher during a second-term presidency and for Democratic presidents by 6.7%, which sheds light on understanding the presidential puzzle. A trading strategy that exploits the GCX demand-based return predictability generates an annualized risk-adjusted performance of 4.8%. Altogether, GCX enhances our understanding of overall uncertainty and a valuable predictor for the financial market.
政府立法指数与股市结果
我们编制了政府确定性指数(GCX),衡量政府执行自己政策的能力;包括总统资历、政治资本和微积分。我们表明GCX与股票市场表现正相关,与股票市场波动负相关(对于高GCX)。我们发现的直觉来自于资产定价行为和风险预期:更强大的政府反映了人民的共识;因此,投资者对强势领导反应过度,股价上涨(回报);一个更强大的政府提供了清晰和更少的不确定性(风险)。我们发现,GCX的影响因行业和十分位数而异,平均而言,GCX在总统第二任期和民主党总统任期内要高6.7%,这有助于理解总统之谜。利用GCX基于需求的回报可预测性的交易策略,经风险调整后的年化回报率为4.8%。总之,GCX增强了我们对整体不确定性的理解,是金融市场的一个有价值的预测指标。
本文章由计算机程序翻译,如有差异,请以英文原文为准。
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