Publication Date
2006
Recommended Citation
Worthington, A. C., Political cycles and risk and return in the Australian stock market, Menzies to Howard, School of Accounting & Finance, University of Wollongong, Working Paper 6, 2006.
https://ro.uow.edu.au/accfinwp/22
Abstract
This paper examines the presence of a political cycle in Australian daily stock returns over the forty-seven years from 6 January 1958 to 30 December 2005. The period selected includes nineteen federal elections, twenty-five ministries and five terms of Liberal-National or Labor government. The political cycle is defined in terms of the party in power, the time since the last election and election information effects. The market variables are defined in terms of nominal and real returns and nominal and real return volatility. The results indicate returns are highest during the ministries of Holt-McEwen and Hawke and lowest during Whitlam and Fraser, while risk is highest during Whitlam and Hawke and lowest during Menzies and Holt-McEwen. However, regression analysis shows that Liberal-National and Labor governments more generally differ in the volatility of returns where political cycle-sourced return volatility increases at a decreasing rate with the time in power. Such risk differences potentially arise from the different parties’ economic and social policies, uncertainty among investors about these policies, or doubt among voters concerning future election outcomes.