Presidential economic approval rating and the cross-section of stock returns

• Main Authors: CHEN, Zilin, DA, Zhi, HUANG, Dashan, WANG, Liyao
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: Political cycle; Presidential economic approval rating; Presidential job approval rating; Presidential puzzle; Sentiment; Finance and Financial Management; Political Economy; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7104; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8103/viewcontent/PEAR_av.pdf
• Institution: Singapore Management University

We construct a monthly presidential economic approval rating (PEAR) index from 1981 to 2019, by averaging ratings on the president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those with low betas by 1.00% per month in the future, on a risk-adjusted basis. The low PEAR beta premium persists up to one year, and is present in various sub-samples and even in other G7 countries. PEAR beta dynamically reveals a firm’s perceived alignment to the incumbent president’s economic policies and investors seem to misprice such an alignment.