The investment universe consists of common stocks listed on NYSE, AMEX, and the Nasdaq stock exchanges. Author collects a large sample of speeches (i.e., news conferences, interviews, state of Union speeches, remarks, radio speeches, and oral addresses) of U.S. presidents from February 1929 to December 2020. Fiscal News Index is constructed using the latent Dirichlet Allocation (LDA) algorithm as the average of the proportion of Topic 0 (Fiscal Topic) in all paragraphs of President speeches during the month.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Monthly | MARKET: equities | KEYWORD: Presidential, Fiscal News, Stock
I. STRATEGY IN A NUTSHELL
This monthly strategy trades U.S. stocks (NYSE, AMEX, Nasdaq) using a Fiscal News Index (FNI) derived from presidential speeches. Stocks are sorted by sensitivity to FNI, forming high-minus-low portfolios—long the most sensitive, short the least sensitive—rebalanced monthly.
II. ECONOMIC RATIONALE
Stocks highly sensitive to presidential fiscal news carry higher perceived risk. By targeting these exposures, the strategy captures excess returns linked to political policy expectations, leveraging speech-driven sentiment as a priced risk factor.
III. SOURCE PAPER
Presidential Fiscal News and Cross-section of Stock Returns [Click to Open PDF]
My T. Nguyen, Washington University in St Louis, John M. Olin Business School
<Abstract>
Implementing textual analysis, this paper constructs the long time-series Fiscal News Index based on a large sample of U.S. Presidential Speeches between February 1929 and December 2020. The Fiscal News Index is a priced risk factor in the cross-section of stock returns. Investors demand higher expected returns for holding stocks with high exposure to Fiscal News Index. A long short trading strategy based on this risk factor generates an average excess returns of 8.2% annually with a Sharpe ratio of 0.86. Empirical results also suggest better ability of Fiscal News compared to other business cycle indicators in terms of pricing cross-section of stock returns.
IV. BACKTEST PERFORMANCE
| Annualised Return | 6.17% |
| Volatility | 15.05% |
| Beta | N/A |
| Sharpe Ratio | 0.41 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
