PMT EFFECT: A STUDY OF THE U.S. MIDTERM ELECTIONS AND THE HEALTH CARE SECTOR

Abstract

During the run-up to the 2014-midterm elections, the press frequently covered debates on health care reforms. In fact, through the course of time, the health care sector had experienced many changes due to the outcome of these debates and/or changes in the ruling party. The midterm elections serve as a litmus test for the support of the current President’s initiatives. The outcome of the elections can potentially alter the balance of power in these political debates. As these reforms fundamentally affect the sector, the author believes that the health care sector experiences a form of uncertainty associated with the sway of reform support. Uncertainty should be particularly high in the months following the midterm elections, and the additional risk exposure should be compensated with higher returns. This paper documents the existences of a post-midterm election premium (PMT premium); whereby the average MoM excess return during the PMT period are larger as compared to the EX-PMT period. In this study, the author proves that the health care sector enjoys a MoM PMT premium of 2.34% in the 8-month period following the midterm elections. This period experienced improved risk-return characteristics; shown by a higher Sharpe ratio. The findings documented persist even when data points of high influence were removed, and also in the subsample analysis