Aggregate congressional trading and stock market returns
Journal of Financial Economic Policy
ISSN: 1757-6385
Article publication date: 7 June 2021
Issue publication date: 16 February 2022
Abstract
Purpose
What information do members of Congress (politicians) use when they trade stocks? The purpose of this paper is to attempt to answer this question by investigating the relationship between an aggregate measure of trading by members of Congress (aggregate congressional trading) and future stock market returns.
Design/methodology/approach
The authors follow the empirical framework used in academic work on corporate insiders. In particular, they aggregate 61,998 common stock transactions by politicians over the 2004–2010 period and estimate time series regressions at a monthly frequency with heteroskedasticity and autocorrelation robust t-statistics.
Findings
The authors find that aggregate congressional trading predicts future stock market returns, suggesting that politicians use economy-wide (i.e. macroeconomic) information in their stock trades. The authors also present evidence that aggregate congressional trading is related to the growth rate of industrial production, suggesting that industrial production serves as a potential channel through which aggregate congressional trading predicts future stock market returns.
Originality/value
To the best of the authors’ knowledge, this study is the first to document a relationship between aggregate congressional trading and stock market returns. The media and scholarly attention on politicians’ trades have mostly focused on the question of whether politicians have superior information on individual firms. The results from this study suggest that politicians’ informational advantage may go beyond individual firms such that they potentially have superior information on the overall trajectory of the economy as well.
Keywords
Acknowledgements
The authors thank editors Scott Hein, Jeff Mercer and Drew Winters and the anonymous referee for helping them improve this manuscript. They also thank Ron Balvers, Harry Turtle, Jung Chul Park, Minh Tam Tammy Schlosky, Alex Kurov, Arabinda Basistha, William Reece, Feng Yao, Ann Marie Hibbert, Jorida Papakroni and the seminar participants at the Financial Management Association (FMA) meetings for their helpful comments. They are also grateful to Susan Alger at the Center for Responsive Politics (www.opensecrets.org) for kindly providing the data on the politicians’ transactions. All remaining errors are theirs.
No funding was received for this study.
Citation
Karadas, S., Schlosky, M.T.T. and Hall, J.C. (2022), "Aggregate congressional trading and stock market returns", Journal of Financial Economic Policy, Vol. 14 No. 2, pp. 172-186. https://doi.org/10.1108/JFEP-02-2021-0035
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited