The impact of politics and economic policy uncertainty on anomaly-based investment strategies
ISSN: 0307-4358
Article publication date: 4 April 2019
Issue publication date: 16 May 2019
Abstract
Purpose
The purpose of this paper is to explore the overlooked relationship between politics and the performance of anomaly-based investment strategies.
Design/methodology/approach
Monthly long-short portfolios are formed based on relative mispricing scores according to the Stambaugh et al. (2012, 2015) relative mispricing measure. Portfolio performance is examined throughout various presidential terms. The design also introduces economic policy uncertainty (EPU) as a possible explanatory variable for portfolio performance.
Findings
The analysis reveals that anomaly-based returns are higher under Republican administrations than they are under Democratic administrations. Moreover, the results show that the impact of EPU on the relationship between the political party affiliation of the president and future anomaly-based returns are driven by the election and post-election years.
Practical implications
The examination of returns on a long-short portfolio may be of particular value to investment companies, such as hedge funds, who regularly employ this type of strategy.
Originality/value
While the impact of presidential terms on raw equity returns has been well examined, the paper is the first to examine the impact of presidential terms on the return of an anomaly-based investment strategy. EPU is also introduced as an important contributing factor.
Keywords
Citation
Mbanga, C., Jones, J.S. and Hoelscher, S.A. (2019), "The impact of politics and economic policy uncertainty on anomaly-based investment strategies", Managerial Finance, Vol. 45 No. 5, pp. 654-670. https://doi.org/10.1108/MF-08-2018-0378
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited