Examining the stock return predictability by ruling parties

Abstract

This paper reexamines the stock returns predictability of data from 1980 to 2013 by using the dividend yield model developed by Campbell and Shiller (1988) There have been inconsistent empirical findings in the past studies on this topic Thus besides dividend yield both 17 macroeconomic announcements and the effect of ruling parties are introduced to the prediction model in order to increase the predictability The macroeconomic announcement is defined by the difference between the expected and real value of the macroeconomic indicator in order to include the timing and sign effect Furthermore the effect of ruling parties represents investors’ political preferences so it provides a sign effect According to the empirical results dividend yield is a significant predictor The effect of the Democratic Party has a negative relation with dividend yield and most macroeconomic announcements and its effect is more significant when introducing the effect of ruling parties along with some macroeconomic announcements Personal consumption expenditures personal income unemployment rate and retail sales are the most effective predictors among those under consideration Only retail sales has a significant interaction with the ruling parties Furthermore the effect of ruling parties has a greater influence on the predictability of stock returns than any other macroeconomics announcement

Date of Award	2015 Feb 24
Original language	English
Supervisor	Min-Hsien Chiang (Supervisor)