Goldilocks in the Trump Stock Market:
Over, Under and Just Right Reactions
Richard Zeckhauser, HKS and Alexander Wagner, University of Zurich
CAMBRIDGE MA – While the stock market reflects small tremors every day due to countless fluctuations, few events cause the "earthquake equivalent of what happened the day President Trump was elected," according to Richard Zeckhauser, Frank Plumpton Ramsey Professor of Political Economy at HKS. He, along with Alexander Wagner, Associate Professor of Finance at the University of Zurich, gave the final seminar of the semester in M-RCBG’s Business and Seminar Series on May 1. Titled Goldilocks in the Trump Stock Market: Over, Under and Just Right Reactions, the pair discussed how the stock market reacts when the unexpected happens, using Trump’s election as an example. The seminar was hosted by the Mossavar-Rahmani Center for Business & Government as part of its weekly Business & Government Seminar Series.
Using data collected from Election Day through the following ten days, Zeckhauser and Wagner explained how the market took an overnight dip when it became clear Trump would emerge as the winner, and then reversed and steadily increased over the next week. In individual stocks, the pattern they label an "underreaction due to slow information processing" was particularly visible. Different issues such as taxes and trade policy were priced at different speeds. "Our basic theme is that if something is easy to discern, the market will get it right quickly," Zeckhauser said. "If it’s hard to discern, it will take a little longer for the market to get right…but eventually it will."
Wagner showed a graph that demonstrated how in the first day after an election, stocks that did well the day after Trump’s win continued to do well during the following days, and those that fared poorly, relative to the overall market, continued to fare poorly. He highlighted that while the US had elected a new president, no new information nor policy pronouncements were presented in those ten days. As such, these initial days provide an opportunity to study how the market processed the news of the election. "There was a pattern of momentum followed by modest reversal…and [the market] wasn’t updating as quickly as [it] should have if it were fully efficient."
One intriguing phenomenon Zeckhauser and his co-authors discovered was that while – as expected – the coal industry and other carbon-intensive industries did well after the Trump victory, so did environmentally responsible firms. Were some investors betting on a regulatory boomerang down the road? While there is no perfect answer yet, the evidence – drawn from comparing firms with predominantly long-horizon and short-horizon investors – points in that direction.
The following papers are available here:
"Company Stock Price Reactions to the 2016 Election Shock: Trump, Taxes, and Trade," Alexander F. Wagner, Alexandre Ziegler, and Richard Zeckhauser, Journal of Financial Economics, forthcoming.
"Unequal Rewards to Firms: Stock Market Responses to the Trump Election and the 2017 Corporate Tax Reform," Alexander F. Wagner, Alexandre Ziegler, and Richard Zeckhauser, American Economic Association Papers and Proceedings 2018, forthcoming.
"Paths to Convergence: Stock Price Behavior After Donald Trump’s Election, " Alexander F. Wagner, Richard J. Zeckhauser, and Alexandre Ziegler, mimeo, February 2018.
The following paper is available from the authors upon request:
"Stock Price Rewards to Corporate Responsibility on Climate Change: Evidence from the Trump Election, " Stefano Ramelli, Alexander F. Wagner, Richard J. Zeckhauser, and Alexandre Ziegler, mimeo, April 2018.
Richard Zeckhauser is the Frank P. Ramsey Professor of Political Economy at HKS. He graduated from Harvard College (summa cum laude) and received his Ph.D. there. He is an elected fellow of the Econometric Society, the Institute of Medicine (National Academy of Sciences), and the American Academy of Arts and Sciences. In 2014, he was named a Distinguished Fellow of the American Economic Association. His contributions to decision theory and behavioral economics include the concepts of quality-adjusted life years (QALYs), status quo bias, betrayal aversion, and ignorance (states of the world unknown) as a complement to the categories of risk and uncertainty. Many of his policy investigations explore ways to promote the health of human beings, to help markets work more effectively, and to foster informed and appropriate choices by individuals and government agencies. Zeckhauser has published over 300 articles. His recent coauthored books are The Patron's Payoff: Conspicuous Commissions in Italian Renaissance Art (2008), and Collaborative Governance: Private Roles for Public Goals (2011). Apart from academics, Zeckhauser is a Senior Principal at Equity Resource Investments, a real estate private equity firm. He has won multiple national championships in contract bridge.
Alexander Wagner is an Associate Professor of Finance at the University of Zurich. He joined SFI in 2006 and has held an SFI Junior Chair since 2012. He obtained his PhD in Political Economy from Harvard University. His research has been published in leading academic journals. Prof. Wagner is Chairman of the Swipra Foundation and an independent counsel for PwC. He is a regular speaker at conferences and panel debates both in Switzerland and abroad. His talk on "What really motivates people to be honest in business" was featured on TED.com.