The Hague meets AEX

I find that monthly excess returns of the AEX are 1.3 percent higher when left-wing political parties join the coalition in the Netherlands. These excess returns are not found when center-wing or right-wing political parties join the coalition, as the risk-adjusted returns are nullified by the negative effect of divided governments. In situations of divided governments the two Houses are controlled by opposing parties resulting in a stationary situation as the incumbent government has fewer degrees of freedom. The effect of divided governments on the monthly returns of the AEX varies between -0.9 percent and -3.2 percent, which is in all cases significant at a one percent level. Investor sentiment does not seem to have a clear effect on the returns of the AEX. Although left-wing politics clearly correlates with the monthly returns of the AEX, it does not seem to have predictive power. The presidential puzzle is also visible in the Netherlands, however it is not as strong as in the US.