Shifts in Political Environment and Industry Momentum: Evidence from Global Stock Markets

Wang, Zhongyang

Shifts in Political Environment and Industry Momentum: Evidence from Global Stock Markets

Abstract

This paper aims to examine whether shifts in the political environment can explain industry momentum profits in global stock markets. In the U.S., Canada and Australia, I find that the politically consistent momentum strategy, which takes a long position in industries that are both winners and politically favored and a short position in industries that are both losers and politically unfavored, outperforms the standard momentum strategy. In contrast, the politically inconsistent momentum strategy, which has a long position in industries that are winners but politically unfavored and a short position in industries that are losers but politically favored does not generate significant profits. Further, I find that a political-sensitivity-based long-short portfolio explains approximately 20% to 40% of industry momentum profits in the three countries. This explanatory power is concentrated around presidential (prime minister) elections. Overall, the results support the theory that investor underreaction to political information generates momentum. In other countries in which the pattern cannot explain momentum returns, I attempt to provide a new conjecture.

Description

55 pages

Date Issued

2022-05

Keywords

behavioral finance; industry momentum; momentum profits; party change; political climate

Committee Chair

Addoum, Jawad M.

Committee Member

Murfin, Justin

Degree Discipline

Applied Economics and Management

Degree Name

M.S., Applied Economics and Management

Degree Level

Master of Science

Types

dissertation or thesis