Use stock market data to examine the stock market performance during Republican and Democratic presidencies. Report the raw as well as risk-adjusted performance of the stock market during the Republican and Democratic presidencies. Also, compute the risk measures to determine whether risk differences can explain the differences in the performance.
As indicated in the market performance below, there is an improvement in albeit by a small margin. The changes are taking place in the democratic years more than the situation for the republican period. In general, there is a much better performance for the democratic years since the rate of return is much higher. The Sharpe ratio is equally relatively high compared to the counterpart’s republicans (Hirshleifer, 2014). The situation presented in the outcomes is due to several factors, including war, economic times, and various presidential policies.
Their volatility in the past ten years was very low, implying fewer changes in the prices for securities. Democrats would have been a good investment ten years ago compared to one years ago, where the volatility is much higher. The Sharpe ratio was equally higher ten years in the past than it is at the moment and five years ago (Hirshleifer, 2014). That implies that democrats would have been a good investment ten years ago as it would be easy to manage the risk associated with the investment.
The risk adjustment portfolio for the stock market during the democrat precedency is more diverse, investing in the portfolio more effectively and efficiently. It is anticipated that the outcomes would be much higher than the stock investment during a republican president’s reign. The risk measure effectively describes the distinction that exists between the levels of performance (Hirshleifer, 2014). During the republican presidency, a much higher risk was associated with the economic performance and presidential policies, resulting in a smaller Sharpe ratio. The situation is different in the democrat’s presidency since their economic times are favorable, and the risk for investors is much lower.
Provide a brief discussion of your empirical findings. Please explain the pattern you observe and provide some conjectures for why these patterns exist. It would be useful if you can provide evidence (even anecdotal) to support your arguments. Also, please explain whether you think the results you find are economically meaningful and why.
According to various studies and the outcomes presented in the analysis and depicted in the question above, the stock market’s performance is much higher in the periods where a democrat was the president of the United States. As I have stated previously, several factors contribute to the variables such as war, economic times, policies of the president, and the exchange is among others. Things are not simply cut and dry, but there is a pattern that can be identified in the level of performance for the stock market. Therefore, it is impossible to conclude that the market will perform better depending on whether the president is a democrat or a republic (French, 2015). Global markets come into action as they play an essential role in providing a way that the decisions of a single political party from the government do not contribute to the performance in the market. A typical pattern that can be identified is the changes taking place in the monthly arithmetic return per presidency period. After every four years, the value changes from positive to negative, which translates to the Sharpe ratio. For instance, in the first period from 1929 to 1933, their value was -0.0216, and the president was a republican. In the following period, the value changes to positive 0.0124 where the president is a democrat and persists for four consecutive periods, after which it becomes negative again (Yahoo Finance, n.p). The pattern might be in existence due to the effects that presidential policies have on the market. The results are economically meaningful because they will assist in the decision-making of foreign investors.
Are there certain types of firms or industries that are more likely to be sensitive to political cycles? Why? Would the returns of those firms be higher or lower during a Democratic presidency? Please provide evidence (even anecdotal) to support your conjectures.
Historically, some organizations tend to perform better when a particular political party is ruling when compared to when the opposition takes power. The various financial institutions can gain from the republican presidencies due to a reduction in the number of regulations on how they are supposed to carry out their operations (Yahoo Finance, n.p). However, the data and analysis that has been presented above do not indicate many positive outcomes that will be effective in supporting the argument that has been submitted. But for other industries, such as those of healthy, their level of performance is much better in democratic presidencies (Kumar, 2015d). However, other entities, such as the army industry, do not do wrong under wither. In the republican government, those who own guns are taxed since there is a lack of a threatening feeling to their firearms, but still, they take the step of making a free purchase. The situation is different is the president of the United States is a democrat because gun owners tend to buy earlier and more often. Therefore, the industry makes more money, and the amount of revenue that is generated increases.
Can investors take advantage of the opportunity that you have identified? Why or why not?
Yes, the investors can take advantage of the opportunity that has been identified. That is because the fun sector is one of the very rare industries but can thrive under both parties. It does not matter whether the president is from the democrats or Republican Party. In one part, there is the lax restriction that has been put in place, and a critical standard of operation is fear (French, 2015). Also, I believe that the gas and oil industries will thrive much better under the republican government. That is because there is a distinction in how the world issue is perceived compared to the democrats. Based on my opinion, investing in either of the two industries under the republican presidency will be an intelligent move. That is because the policies and measures that have been put in place aim to ensure there is an effective and efficient allocation of resources that will result in a much higher level of outcomes for the gain of the investors.
Why don’t arbitrageurs exploit this opportunity? What are some reasons that may limit the role of arbitrageurs?
Arbitrageurs fail to exploit the opportunity simply because the market is imperfect and will never be the case under all circumstances. Therefore, it is impossible to predict the most appropriate time to strike and make a deal, and the items for consideration are based on the political parties involved (French, 2015). Hence, there are limitations on the role that the arbitrageurs can play in ensuring that they gain the most out of an investment they make in any of the respective industries. Unfortunately, even the historical data will not play a vital role because the changes and moment that is taking place in the market are on personal space. There is no single individual in control of the situation while the forces of demand and supply have been left to dictate the operations that will take place. Lastly, the majority of the United States market is congested with non- US Hispanic organizations. Therefore, it will not be possible for the opportunity to present itself even if that is what the arbitrageurs wanted by all means.
The arbitrageurs are those who take advantage of a profit through taking advantage of the financial market situation. However, they might fail to take advantage of the situation simply because of the risk factors. They will have to evaluate the level of risk before considering and investment. Because, the rate of risk of the opportunity is very high the arbitrageurs are less likely to consider the investment opportunity. The number of buyers and sellers in a perfect market are many and are more informed than monopoly. Also, it is not possible to manipulate the market prices. The situation is a turn off for the arbitrageurs because they will not be in control. They are less likely to stay in a place where there is uncertainties in the outcomes of the future investments. A key consideration is the fact that they are not able to be in charge of the investment situation as are likely to loss. The category of individuals usually take opportunity of investment portfolios where there are foreseeing a gain and are less likely to take part in risky behaviours.
References
French, K. R. (2015). Current research returns. Retrieved from http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.
Hirshleifer, D. A. (2014). Behavioral finance. Working paper. Retrieved from Social Science Research Network (SSRN): http://ssrn.com/abstract=2480892
Kumar, A. (2015d). Lecture notes 4 [PowerPoint slides].
Yahoo Finance (n.d.). Yahoo Finance. Retrieved from http://finance.yahoo.com.
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