Does the U.S. President Affect the Stock Market?
I find that in a world with asymmetric information and short-sale constraints, sentiment and disagreement over political outcomes should play a key role in determining asset prices. Consistent with the model’s predictions, I show that in the U.S. (1) higher sentiment and disagreement are both followed by lower stock returns; (2) the two effects interact with each other, as positive (negative) sentiment offsets (reinforces) the impact of disagreement; and (3) disagreement is increasing in the President’s incentive to engage in opportunistic behavior. Overall, the paper provides a unified framework to think of how politics affects investment choices.
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