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This study examines the influence of the presidential elections on the behaviour of US investors according to the trading activity of two of the most popular investment vehicles: exchange-traded funds and close-ended funds.

Based on the fact that investors in these two investment vehicles differ by, at least, two demographic factors that influence investment decisions, age and labour status, inferences are made about the degree of interest and the amount of trading activity that presidential elections provoke.

The evidence demonstrates that, during the last four US presidential elections, exchange-traded funds' investors trade significantly more than close-ended funds' investors during several event windows centred on the day of an election in which a republican candidate is elected. Close-ended funds' investors are more active during the election of a democratic candidate, although the statistical evidence in that regard is weak. Thus, it appears reasonable to conclude that younger investors who are gainfully employed are induced to trade by a presidential election in which a republican candidate prevails. Apparently, a democratic victory does not provoke the same behaviour.

Although the relation between politics and economics is not an unexplored topic, it is not clear whether the presidential elections themselves constitute an event that triggers the trading behaviour of investors.

The purpose of this paper is to examine the shifts in investor sentiment around the last seven US presidential elections (1988 through 2012).

Investor sentiment is measured by changes in closed-end funds discounts, and the results are corroborated with three robustness tests, including an alternate measure of investor sentiment obtained from the survey conducted by the American Association of Individual Investors.

Closed­end funds discounts are significantly diminished from two weeks before a US presidential election to a week before the election, and persist until the week after the election, suggesting an increase in investors’ optimism during that period, particularly when a Democrat is elected president. More than the particular party prevailing, however, investors appear to be more interested in avoiding the entrenchment of power since the results suggest that they become optimistic when a change in the ruling party takes place, but become pessimistic when there is power continuity in the White House. The increase in investor optimism that is observed around the time of US presidential elections is not replicated during non-election years, which seems to corroborate that the elections are indeed driving the results.

This paper is the first to formally examine the relation between investor sentiment and US presidential elections using closed-end funds discounts as the measure for sentiment.