Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Finance | Finance | 2014
Thesis number: 14532
Are stock returns elevated under left-wing governments in Finland? The evidence from 1917-2007
|Title:||Are stock returns elevated under left-wing governments in Finland? The evidence from 1917-2007|
|Year:||2014 Language: eng|
|Department:||Department of Finance|
|Index terms:||rahoitus; financing; osakemarkkinat; stock markets; tuotto; rate of return; taloudellinen kehitys; industrial development; politiikka; politics; sijoittajat; investors|
» hse_ethesis_14532.pdf size:2 MB (1160680)
|Key terms:||Presidential premium, left-wing government, stock returns|
PURPOSE OF THE STUDY The purpose of this study is to determine whether or not stock returns are higher under left wing governments. The common wisdom might be that right-wing, fiscal conservative, parties are better for economics but the results obtained in studies have been contrary, and mixed. This study will add to the discussion by studying this effect in Finland. Finland has a multi-party parliamentary system, unlike many countries including the United States, and this study contributes by creating a freely varying leftist variable for governments instead of using binary values. Additionally, I have newly created a long-term Finnish stock index dating back to 1917.
DATA AND METHODOLY The main data set is comprised of monthly observations for value and equal-weighted total return indexes from the Finnish stock market during a time period between 1917 and 2007. In order to evaluate Finnish governments over the decades I created a (non-binary) political variable that encapsulates the left-right -wing orientation of sixty-two governments incumbent during the time period.
To test my hypothesis I complete univariate analysis and ran a series of regressions. I conduct OLS regression on value-weighted and equal-weighted real and excess stock returns alike. To obtain robust results with long time series I will also utilize GARCH regressions for the same variables. All the regressions are both with binary left-right and freely varying "leftist" variables. To determine, if possible, abnormal returns are expected or not, I will also test for election shocks. A greater volatility (risk) of stock returns for left or right-wing governments can explain a difference in stock returns levels as well, and it will be further examined in this study.
RESULTS Similar to earlier studies, I find significant abnormal excess returns and non-significant real returns during incumbencies of left-wing governments. The results are more evident when using freely varying leftist variables. Interestingly, abnormal left-wing returns are realized around the election months. Inflation and volatility are on average higher for left-wing governments but this does not alone explain the abnormal stock returns under left-wing governments' incumbencies.
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