Researcher Studies Links Between Stocks and Government Spending
July 29, 2013
Dr. Jun Li
A UT Dallas finance expert’s new research suggests that before you invest in certain industries, it could pay off to consider which political party is in the White House.
Dr. Jun Li, assistant professor of finance in the Naveen Jindal School of Management, found that industries that benefit from government spending have higher-than-average profits during Democratic presidencies. These include defense, oil and gas, shipbuilding and scientific research.
“The strategy is particularly profitable during the second and third year of each presidency,” Li said. “So it is not a bad idea to invest in high government exposure firms by the end of this year.”
Stocks in these industries have underperformed during Republican administrations.
The study, “Government Spending, Political Cycles and the Cross Section of Stock Returns,” by Li, Frederico Belo of the University of Minnesota and Vito D. Gala of the London Business School, was published in the Journal of Financial Economics this year.
The article states that firms with “high government exposure” performed 6.1 percent higher than firms unaffected by government spending when Democrats were in charge, and 4.8 percent lower than other types of industries during Republican administrations.
Dr. Jun Li
TITLE: Assistant professor, finance and managerial economics
RESEARCH INTERESTS: Asset pricing, stock returns
PREVIOUSLY: PhD student, Carlson School of Management, University of Minnesota
Multiple studies have examined the impact of presidential administrations on stock performance. But Li and his co-author’s research finds that the effect is concentrated in firms impacted the most by government spending.
Li, who joined the faculty last year, and his co-authors examined industry data from the Bureau of Economic Analysis from 1955 to 2009, which covered 15 presidential terms. The assistant professor, who teaches investment management, said he hopes that investors can benefit from the results.
After earning his bachelor’s and master’s degrees in physics, Li changed course after taking an asset pricing course. He went on to earn a doctorate in finance last year from the University of Minnesota, where he received the Carlson School PhD Student Teaching Award.
“I want to understand the underlying forces that are driving stock market fluctuation, whether because of economic fundamentals or investor psychology,” he said.
Dr. Hasan Pirkul, dean of the Jindal School and Caruth Chair of Management, said that Li is making important research contributions that will help advance UT Dallas’ mission to become a nationally competitive research university.
“Dr. Li is making new insights into stock market fluctuations,” Pirkul said. “We are excited about his current research and look forward to his future contributions.”
Li said that the value placed on research is part of what drew him to the school.
“UT Dallas is relatively new compared to other research universities, but its ambition and active research environment is most attractive to me,” he said.