What is Presidential Puzzle ?

This is an old finding by Santa-Clara and Valkanov (2003) They find that "

Excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value‐weighted and 16 percent for the equal‐weighted portfolio.

At the time the finding was very robust and did not seem to be explained by anything else. What is more impressive is that 18 years later the result still holds true. We now have a very good out-of-sample period. This is confirmed by Pastor and Veronesi (2017) recent work. More interesting, they rationalize the finding by building a continuous-time general equilibrium model and conclude that:

When risk aversion is high, agents are more likely to elect the party promising more fiscal redistribution. The model predicts higher average stock market returns under Democratic than Republican presidencies, explaining the well-known “presidential puzzle.”