Asset prices, midterm elections, and political uncertainty

This study attests to the important role of US midterm elections in asset pricing, even more important than presidential elections. In months following the midterms, equity premiums, mutual fund flows, and real investment growth rates are significantly higher and Treasury premiums are lower. This is consistent with theoretical models relating higher asset prices to lower future discount rates when post-election political uncertainty decreases. The results are robust to different measures of uncertainty. Also, market betas relate positively to the cross section of average returns in post-midterm months, but the relation is flat in other months. (c) 2021 Elsevier B.V. All rights reserved.

Automated summary

This study shows that US midterm elections play a crucial role in asset pricing, even more so than presidential elections. In the months following midterm elections, equity premiums, mutual fund flows, and real investment growth rates significantly increase, while Treasury premiums decrease. The results are consistent with theoretical models linking higher asset prices to lower future discount rates when post-election political uncertainty decreases.