The link the market refuses to accept: Political variables and the excess returns on the Swedish stock market

Sammanfattning: Excess returns in the Swedish stock market are higher under left-winged than right-winged governments. The differences in excess returns between the governments are neither explained by a higher risk nor a higher interest rate. This is concluded by applying an OLS regression approach to Swedish data from 1901 through 2012, and the findings are both significant and robust. Swedish excess returns are also compared to multiple control variables, leading to the conclusion that internal factors have a great impact on the variations in excess returns. Thus, making the found link between left-winged governments and higher excess returns even more important to both investors and Swedish voters. The market does not incorporate this positive relationship, and is consequently not working in an efficient manner. Instead, both investors and voters still believe the link to be the opposite, i.e. that right-winged governments will create higher returns. This thesis shows that political variables have an impact on excess returns and that the left-winged government has a substantially higher reward-to-volatility. Further, this relationship contradicts the random walk theory, the efficient market hypothesis and CAPM.