Sunday, June 3, 2012

Could the Fed Save Obama?

Using daily data for the first 5 months or so of 2012, I ran some regressions with the dependent variable being Obama's re-election closing prices on Intrade (i.e. what the Intrade market predicts Obama's chances are to be re-elected.)  There were 105 observations, and here are some results:

When I regress Obama's closing price on the daily  adjusted closing price of the S&P 500 and a time variable, I find Obama's re-election odds and the S&P 500 are positively correlated, and the correlation coefficient is highly significant.  You can also see the R-squared is quite high.


regress obamaclose spadjclose time

      Source |       SS       df       MS              Number of obs =     105
-------------+------------------------------           F(  2,   102) =  165.51
       Model |  750.217165     2  375.108582           Prob > F      =  0.0000
    Residual |  231.172684   102  2.26639886           R-squared     =  0.7644
-------------+------------------------------           Adj R-squared =  0.7598
       Total |  981.389849   104  9.43644085           Root MSE      =  1.5055

------------------------------------------------------------------------------
  obamaclose |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
  spadjclose |   .0552766   .0040307    13.71   0.000     .0472816    .0632716
        time |   .0329881   .0051778     6.37   0.000     .0227178    .0432583
       _cons |  -18.34905   5.368125    -3.42   0.001     -28.9967     -7.7014
------------------------------------------------------------------------------



That's something of a dog bites man result, since it just says voters want a good economy.  Now I regress Obama's closing prices on inflation expectations (as measured by 5-year TIPS spreads) and a time variable.  The correlation is positive and highly significant.  This result is not shocking, but it does suggest that perhaps Obama should favor more expansionary monetary policy.


regress obamaclose inflex time



      Source |       SS       df       MS              Number of obs =     105
-------------+------------------------------           F(  2,   102) =  151.93
       Model |  734.747095     2  367.373548           Prob > F      =  0.0000
    Residual |  246.642753   102  2.41806621           R-squared     =  0.7487
-------------+------------------------------           Adj R-squared =  0.7438
       Total |  981.389849   104  9.43644085           Root MSE      =   1.555

------------------------------------------------------------------------------
  obamaclose |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
      inflex |   16.75131   1.285248    13.03   0.000     14.20203    19.30059
        time |   .0411078    .005171     7.95   0.000     .0308512    .0513643
       _cons |   23.92947   2.415287     9.91   0.000     19.13876    28.72018
------------------------------------------------------------------------------


Now I regress Obama's re-election odds on the S&P and inflation expectations and a time variable.  Both S&P and inflation expectations have positive coefficients and are highly significant.  I think this result is interesting, because it says that even controlling for the value of the stock market, monetary expansion helps Obama's re-election chances.  The explanation might be that expansionary monetary policy (in our current circumstances) helps the economy more than just by making us wealthier, but it also improves the employment situation, and though those two outcomes are related they are not identical.

 regress obamaclose spadjclose inflex time

      Source |       SS       df       MS              Number of obs =     105
-------------+------------------------------           F(  3,   101) =  123.57
       Model |  771.255054     3  257.085018           Prob > F      =  0.0000
    Residual |  210.134794   101  2.08054252           R-squared     =  0.7859
-------------+------------------------------           Adj R-squared =  0.7795
       Total |  981.389849   104  9.43644085           Root MSE      =  1.4424

------------------------------------------------------------------------------
  obamaclose |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
  spadjclose |   .0332366   .0079343     4.19   0.000      .017497    .0489762
      inflex |   7.788602   2.449327     3.18   0.002     2.929797    12.64741
        time |   .0351098   .0050057     7.01   0.000     .0251799    .0450397
       _cons |   -3.55992   6.934249    -0.51   0.609     -17.3156    10.19576
------------------------------------------------------------------------------

In conclusion, Obama should be listening to the Sumners of the world and seek more expansionary monetary policy.

Here's a scatter plot of Obama's closing prices and inflation expectations: 


(Data from Intrade, Yahoo Finance, and Treasury.gov.)


UPDATE: Justin Murphy has a different take on this data.

UPDATE 2: Since this post has gotten some attention, I updated the data a bit.  The graph below shows a scatter plot of Obama's closing % on intrade vs. inflation expectations (as measured by 5 year Treasury rates minus 5 year TIPS) for all of 2012 up to and including September 14, 2012.  It's the same as the graph in the previous post, but it has about 9 and a half months of data instead of 6 months of data.