Political cycles and risk aversion

Abstract

This paper checks whether the main implications of the Pastor and Veronesi (2017) model of political cycles driven by time-varying risk aversion are valid for the Spanish case. In particular, we analyze whether the quarterly growth rate of the Spanish real GDP and the excess return behave in such a way as to support this theory. The conclusions obtained are contrary to the theory since we obtain that the economic growth of the country has been faster under the right wing party, and there are no significant differences in excess returns between mandates. These results suggest that this theory might not explain the Spanish political cycles.