President’s Confidence and the Stock Market Performance

Abstract

We show that the stock market pricing the presidential margin of victory in a nonlinear concave fashion, with a higher price for medium than slight or crushing victories. We conjecture that the margin of victory reflects president confidence and the ability to execute policies. A small margin sends instability signal to financial markets as a lack of confidence president, whereas a decisive victory provides excessive ‘political capital’ and a bold mandate to execute policies, which turns the president to be overconfident. Furthermore, margin of victory commoves with financial and political indicators: the greater the margin of victory the larger the policy uncertainty and partisan conflict. Our inference shed light on “the presidential puzzle,” as many Republican presidents won decisively (Raegan twice, Nixon, etc.), while more Democrats with medium victories. Collectively, president’s confidence affects the stock market and is a key exogenous determinant to consider.