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The Impact of the US Presidential Elections on the Stock View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Theseus The Impact of the U.S. Presidential Elections on the Stock Market Risk - Return Dynamics Tatyana Kauppinen Bachelor’s Thesis April 2020 School of Business Degree Programme in International Business Description Author(s) Type of publication Date Tatyana Kauppinen Bachelor’s thesis May 2020 Number of pages Language of publication: 96 PermissionEnglish for web publication: x Title of publication The Impact of the U.S. Presidential Elections on the Stock Market RiskDegree - Return programme Dynamics Degree programme in International Business Supervisor(s) Hundal, Shabnamjit Assigned by JAMK Centre for Competitiveness Description The political developments, such as presidential elections in a country, are strongly related to economic, business, and social developments. The U.S. presidential elections are so strategic that they impact current and future developments in political, economic, and social developments not only within the USA but globally as well. Every time the presidential elections take place in the U.S. the general instability phenomenon rises, which reflects on the climate of financial markets and it becomes volatile, uncertain, and unpredictable in comparison to other times. The main research problem of this thesis was to investigate if there exist any associations between the U.S. presidential elections and the risk and return of the companies. The secondary data were collected from 50 U.S. publicly listed companies for the four election periods: 2004; 2008; 2012; 2016. Each period included pre, during and post-elections years. All the data were collected from the S&P stock exchange official databases and the financial statements of the sample companies. The analysis was performed by using SPSS software. The analysis included descriptive, correlation, and multivariate ordinary least square (OLS) regression statistics. To support the research hypotheses, that the presidential elections affect the US stock market, the research methods were chosen in a logical and justified manner. The empirical findings show that there is a strong relationship between the U.S. presidential election and market fluctuation. The research results substantiate that the Presidential elections make an impact on stock market risk - return dynamics. However, the unsystematic risk affected the sample companies’ risk adjusted return goes inversely, whereas, the systematic risk was found to be positively associated with both annualized return and risk adjusted annualized return performance are increasing. Therefore, the overall narrative of the thesis is “that is higher the risk, higher the return”. Keywords (subjects) Presidential elections, Risk-Return, Annualized Return of Firm, Market Annualized Return, Jensen´s Alpha, Return to Risk Market, Total Annualized Firm Risk, Total Unsystematic risk. Miscellanous 1 Contents 1 Introduction ............................................................................................................ 3 1.1 Background ...................................................................................................... 3 1.2 Structure of the thesis ..................................................................................... 6 2 Literature review and theoretical background ...................................................... 7 2.1 Historical background ...................................................................................... 7 2.2 Debt and Equity ............................................................................................. 16 2.3 Risk- Return.................................................................................................... 18 2.4 Capital Pricing Assets Model ......................................................................... 25 2.5 Arbitrage Pricing Theory ................................................................................ 29 2.6 Jensen´s Alpha ............................................................................................... 31 2.7 Financial Leverage ......................................................................................... 32 2.8 Empirical Literature Review ........................................................................... 34 2.9 Hypothesis development ............................................................................... 39 3 Methodology ........................................................................................................ 39 3.1 Research design ............................................................................................. 40 3.2 Data collection ............................................................................................... 41 3.3 Data Analysis .................................................................................................. 48 4 Research Findings and Results ............................................................................. 52 4.1 Descriptive Statistics results .......................................................................... 52 4.2 Correlation results ......................................................................................... 57 4.3 Regression analysis results ............................................................................ 66 5 Conclusion ............................................................................................................ 76 5.1 Discussions ..................................................................................................... 76 5.2 Limitations and recommendations for the further research ........................ 82 References .................................................................................................................... 83 2 FIGURES Figure 1 Adapted from Brealey et al. 2014, 170 .............................................. 22 Figure 2 Capital Asset Pricing Model Adapted by author ............................... 28 TABLES Table 1 U.S. Presidential Election Results. Adapted by the author from internet source Encyclopaedia Britannica........................................................ 10 Table 2 Variables description …………………………………….………………………………..42 Table 3 The list of companies ………………………………………………………………………48 Table 4 The abbreviation of variables used in SPSS analyse and its explanation......................................................................................................50 Table 5 Descriptive statistic results of period 1 ............................................... 55 Table 6 Descriptive statistic results of period 2 ............................................... 55 Table 7 Descriptive statistic results of period 3 ............................................... 56 Table 8 Descriptive statistic results of period 4…………………………………….. …...56 Table 9 Correlation analyse results first period (1ElectionRepublicans) ……….………60 Table 10 Correlation analyse results first period (1ElectionsDemocrats)………. …….61 Table 11 Correlation analyse results second period (2ElectionDemocrats) …….…….62 Table 12 Correlation analyse results second period (2ElectionsRepublicans) ……….63 Table 13 OLS Regression Output (1ElectionRepublicans) …………………………… ……….67 Table 14 OLS Regression Output (1ElectionDemocrats) …………….……………………...70 Table 15 OLS Regression Output(2ElectionDemocrats) ….………………………………….72 Table 16 OLS Regression Output(2ElectionRepublicans)…………………………………….75 3 1 Introduction In this chapter the author introduces a background of current thesis, which include inside the research questions, research problems, research objective and the structure of this research work. 1.1 Background The U.S. presidential elections are a very important event for the U.S. as well as for the entire world community because the U.S. is the world's largest economy. (Bajpai P., 2020) The U.S. is a highly developed country which has strong political power. Thus, the U.S. presidential election results can change the direction of world social- politico-economic development. This study is based on the premise that the U.S. presidential elections have a significant impact on the U.S. and global Stock Exchanges. The U.S. stock markets are a biggest in the world. (Surz R., 2018) The stir related to the elections campaign in the U.S., has always been accompanied by controversies in the political and business life of the in U.S. Any developments regarding changes of political ideology and strategy in White House have always been followed by instabilities, reshuffles and readjustments in stock markets. Another premise of current thesis is the level of uncertainty during the period of election campaigns may go up and therefore reflects upon the social and business life of the country. During the elections years Capital markets are operating in uncertain atmosphere and as a result some companies may gain, the others can lose. The research background of this thesis appears on the political developments in the U.S., regarding the presidential elections. The principle of research background is that the stock markets cannot remain unaffected by the political developments. Presidential elections are tightly impacting on the U.S. future development in general and are an integral part of any of political, economic and social development inside and outside of the country. Every time the presidential elections take place in the U.S. the instability phenomenon rises, which is reflecting on financial markets climate itself. Thus, the financial markets
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