Political premiums and election cycles in the UK stock market, 1965 - 2008

ABSTRACT This thesis analyses British stock market returns between 1965 and 2008, by testing two theories that describe the interaction between economics and politics: the political policy theory and the political business cycle theory. Despite that (both nominal and excess) stock market returns were higher in times of Conservative Party dominance, a political premium was found for times of a Labour government: corrected for economic variables that help to explain excess returns, the stock market performs better under a Labour administration and this outperformance is statistically significant. Furthermore, in UK stock market returns no election cycle was found. Since inflation rates do show a cyclical pattern that follows election dates, the political business cycle theory is not rejected: these outcomes just show that the stock market is too efficient to be ‘fooled’ by a government aiming for re-election in its economic policy.