Presidential Elections and Industry Stock Returns: A Test of Market Efficiency.

Document Type

Article

Publication Date

3-2017

Abstract

The purpose of this study is to test the efficient market theory, as well as to see if individual stock industry returns can correctly predict the outcome of a Presidential Election. Specifically, will returns in industries that stand to benefit from the platform of a particular candidate show excess gains in the event-period either prior to or after Election Day? Is it possible to earn returns that are above normal, by having accurate polling data leading into an election? The link of election outcomes and stock market returns has been heavily studied and there is research that shows how certain market aspects can be seen to predict an election outcome. Likewise, we have seen how following a surprise election victory, certain industries have seen supra-normal returns for days and even weeks. According to the semi-strong form efficient markets theory proposed by Eugene Fama, one should not be able to see above normal returns due to using publically available information such as polls. It will not be possible to outperform the market – when adjusted for risk – by using this type of information. All publically available information should already be factored into the stock price.

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