Investor sentiment and US presidential elections. (9th October 2017)

• Record Type: Journal Article
• Authors: Colón-De-Armas, Carlos; Rodriguez, Javier; Romero, Herminio
• Is Part Of: Review of behavioral finance. Volume 9:Number 3(2017)
• Page Start: 227
• Page End: 241
• Publication Date: 2017-10-09
• Subjects: Investor sentiment -- Closed-end funds discounts -- US politics; G11 -- G12 -- G14 -- G23; Investments -- Psychological aspects -- Periodicals; Investments -- Decision making -- Periodicals; 332.605
• DOI: 10.1108/RBF-02-2016-0003
• Languages: English
• ISSNs: 1940-5979

Abstract

Abstract : Purpose: The purpose of this paper is to examine the shifts in investor sentiment around the last seven US presidential elections (1988 through 2012). Design/methodology/approach: Investor sentiment is measured by changes in closed-end funds discounts, and the results are corroborated with three robustness tests, including an alternate measure of investor sentiment obtained from the survey conducted by the American Association of Individual Investors. Findings: Closed­end funds discounts are significantly diminished from two weeks before a US presidential election to a week before the election, and persist until the week after the election, suggesting an increase in investors' optimism during that period, particularly when a Democrat is elected president. More than the particular party prevailing, however, investors appear to be more interested in avoiding the entrenchment of power since the results suggest that they become optimistic when a change in the ruling party takes place, but become pessimistic when there is power continuity in the White House. The increase in investor optimism that is observed around the time of US presidential elections is not replicated during non-election years, which seems to corroborate that the elections are indeed driving the results. Originality/value: This paper is the first to formally examine the relation between investor sentiment and US presidential elections using closed-end funds discounts as the measure for sentiment.