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The impact of politics and economic policy uncertainty on anomaly-based investment strategies

Cedric Mbanga (Department of Finance and General Business, Missouri State University, Springfield, Missouri, USA)
Jeffrey Scott Jones (Department of Finance and General Business, Missouri State University, Springfield, Missouri, USA)
Seth A. Hoelscher (Department of Finance and General Business, Missouri State University, Springfield, Missouri, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 4 April 2019

Issue publication date: 16 May 2019

434

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

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