Presidential Election Cycles and Portfolio Risk: The Size Premium Under Political Transition

Presidential party turnover can create a novel, monitorable portfolio risk state by inducing asymmetric cross-sectional repricing that is not observed by standard equity factors, business-cycle controls, or widely used policy-uncertainty measures. The authors study how these political transitions affect the size premium (i.e., the return spread between small- and large-capitalization stocks) and show that election outcomes generate identifiable risk regimes. Using US data from 1963 to 2024, they find that the size premium is significant only following Democratic victories, and especially after Republican-to-Democratic transitions. These episodes produce sharp repricing of small-cap stocks, concentrated among financially constrained firms with higher leverage, highlighting the role of credit-sensitive vulnerabilities during periods of policy change. Significantly, the post-election size premium does not reverse in the long run, suggesting a durable shift in valuations rather than temporary mispricing. Overall, partisan turnover identifies a predictable window in which the expected return and downside risk of size exposures shift notably, providing important information for portfolio managers on risk budgeting, stress testing, and calibration of size tilts around elections.