Partisan Politics Theory and stock market performance: Evidence for Spain

This paper examines the influence of Spanish major political events on stock market performance by testing the empirical implications of the existing theories focused on the connection between politics and stock exchanges. On the one hand, our findings give support to the partisan politics theory, since stock returns behave differently depending on the political orientation of the government, not only on the day of the national election but also during their tenure of office. On the other hand, the analytical results demonstrate that there are no abnormal positive returns during the second half of the government's term, which contradicts the opportunistic political business cycle theory. Finally, according to Brown et al.'s (1988) Uncertain Information Hypothesis, volatility of stock returns is shown to increase following the arrival of unexpected information.