Political influences on Dow Jones Industrial Average Index returns: perception and reality

International Journal of Business Research, Jan, 2008 by Haiwei Chen, Jim Estes, Greg Richey

TABLE 1--SUMMARY OF DATA

Monthly returns for the Dow Jones Industrial Average Index are
obtained for the period of January 1901 and September 2007.
* indicates at 5% significance level.

Panel A. Summary Statistics

     Mean          Standard       Maximum      Minimum
                   Deviation

    0.42%            5.38%        30.57%       -36.6%
  (t=2.76 *)

Panel B. Political Cycles--Total Number of Months Occupied by Party
Affiliation

                  White House      Senate        House

  Republican           707          693          456
   Democrat            571          585          822
    Total            1,278        1,278        1,278

                   All Three     Gridlock

  Republican           309         n/a
   Democrat            400         n/a
    Total             709          569

Sources: The information on speakers and majority leaders in
each of the two chambers of Congress are obtained from their
websites. Down Jones Index returns are from its website
at http://www.djindexes.com/mdsidx/.

TABLE 2--COMPARISON OF RETURNS DURING DIFFERENT REGIMES

Average monthly returns are calculated for the period under which a
government branch is controlled by one of the two political parties.
Gridlock is the period in which no single party controls both the
Presidency and Congress. Both the t-test and the non-parametric
Wilcoxon Rank test are conducted to test the null hypothesis of
equal means, where the t-value from the t-test and the z-value from
the Wilcoxon test are presented. * and ** indicates at 10% and 5%
significance levels.

Panel A. Presidency

             Republican      Democrat      t-Value      Z-value
Mean            0.3%           0.6%         0.88         0.50
               (5.57%)        (5.15%)

Panel B. Control of Both Presidency and Congress
              Gridlock      No Gridlock    t-Value      Z-value

Mean           0.43%          0.40%         0.12         0.42
              (5.79%)        (5.33%)

Panel C. Duration of Presidency
               First          Second       t-Value      Z-value

Mean           0.16%          0.68%        1.75 *       2.16 **
              (5.19%)        (5.57%)

TABLE 3--ELECTION AND DOW RETURNS

The regression model is [Return.sub.t] = a   b [Return.sub.t-1],  
[theta][Election.sub.t]   [[epsilon].sub.t], where the dependent
variable is monthly Dow returns. The independent variables are lagged
returns and a dummy variable for election that takes a value of one
for an election year and zero otherwise. The generalized method of
moments (GMM) is used in estimation. In parentheses are t-values.
* and ** indicates at 10% and 5% significance levels.

   [alpha]          0.003
                   (1.97 *)

    [beta]          0.067
                   (1.41)

   [theta]          0.002
                   (0.59)

Adj. [R.sup.2]      0.003

      N             1,278

TABLE 4--POLITICAL CONTROL BY ONE PARTY AND DOW RETURNS

The following regression model is used:

[Return.sub.t] = a   b[Return.sub.t-1]   [lambda][Republican.sub.t]  
[pi][Democrat.sub.t]   [[epsilon].sub.t]

where the dependent variable is monthly Dow returns. The independent
variables are lagged returns. The dummy variable Republican takes a
value of one for the period that the Republican Party controls both the
Presidency and Congress and zero otherwise. Likewise, the dummy
variable Democrat takes a value of one for the period that the
Democrat Party takes control of both the Presidency and Congress
and zero otherwise. The generalized method of moments (GMM) is used in
estimation. In parentheses are t-values. * and **
indicates at 10% and 5% significance levels.

     [alpha]           0.004
                      (1.63)

      [beta]           0.068
                      (1.43)

     [lambda]         -0.0004
                     (-0.10)

       [pi]            0.0008
                      (0.23)

  Adj. [R.sup.2]       0.002

        N          1,278

TABLE 5--DURATION OF PRESIDENCY, POLITICAL PARTY, AND DOW RETURNS

The regression model is

[Return.sub.t] = a   b[Return.sub.t-1]   [lambda][Second.sub.t]   [pi]
[Second.sup.*] [Republican.sub.t]   [[epsilon].sub.t],

where the dependent variable is monthly Dow returns. The independent
variables are lagged returns. The dummy variable Second takes a value of
one for the last two years of a Presidency and zero otherwise.
Likewise, the dummy variable Republican takes a value of
one for the period that the Republican Party takes control of
the Presidency and zero otherwise. The interactive term captures the
effect of party affiliation. The generalized method of moments (GMM)
is used in estimation. In parentheses are t-values. * and **
indicates at 10% and 5% significance levels.

     [alpha]           0.002
                      (0.76)

     [beta]            0.065
                      (1.37)

    [lambda]           0.007
                      (2.15 *)

      [pi]            -0.004

 Adj. [R.sup.2]      (-0.90)
                       0.005

        N          1,278