Structural changes in sentiment and returns: evidence from the Trump election

ABSTRACT

Given that regime changes may induce new tendencies and behaviours of financial models, we analyse the impact of sentiment variables on stock market returns for time periods before and after Donald Trump’s election. Using the CAPM and Fama–French three-factor model augmented with sentiment measures, we find evidence of a structural break in the 2016 presidential election data. Our results suggest that the relationship between sentiment and abnormal returns is more negative for the periods following the election, and that researchers modelling sentiment and returns should account for structural breaks.

KEYWORDS:

• Trump
• abnormal returns
• stocks
• structural break

JEL CLASSIFICATION:

• G10
• G12
• G14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ https://www.presidency.ucsb.edu/documents/fact-sheet-president-donald-j-trump-has-delivered-record-breaking-results-for-the-american

² https://www.c-span.org/video/?c4748713/kevin-hassett-council-economic-advisers-chair&start=197

³ Only stocks where prices were available for at least 645 weeks were included.

⁴ For Robustness, we conducted the analysis from the period prior and after the inauguration using a break date of the week ending 20 January 2017. Results are similar and for brevity are excluded.

⁵ We thank the anonymous reviewer for providing a critique regarding alternative models. As such for robustness we estimated several alternative models. Results are similar and can be provided upon request.