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Underreaction to political information and price momentum

journal contribution
posted on 2019-01-01, 00:00 authored by J M Addoum, S Delikouras, D Ke, A Kumar
In this study, we examine whether momentum in stock prices is induced by changes in the political environment. We find that momentum profits are concentrated among politically sensitive firms and industries. From 1939 to 2016, a trading strategy with a long position in winner portfolios (industries or firms) that are politically unfavored and a short position in losers that are politically favored does not generate significant momentum profits. Furthermore, our political-sensitivity-based long-short portfolio explains 23% to 27% (42% to 43%) of monthly stock (industry) momentum alphas. This explanatory power is concentrated around presidential elections, when the level of political activity is high. Collectively, our results suggest that investor underreaction to political information generates momentum in stock and industry returns.

History

Journal

Financial management

Volume

48

Issue

3

Season

Fall

Pagination

773 - 804

Publisher

Wiley

Location

Chichester, Eng.

ISSN

0046-3892

eISSN

1755-053X

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

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