Grading latin american presidents : a view from the stock markets

Abstract

Abstract: We use stock returns to grade presidential economic performance. In efficient markets, asset prices are unique in that they impound the long term effects of changes in the environment, including government policy. To purge national returns of state-of-the-world conditions that do not result from local events, we introduce a global twin portfolio and a regional return. The twin portfolio for a country reports the return of a combination of world stocks that each month has the same industrial composition as that one country’s stock index. These benchmark external conditions are most volatile: they vary between a 295% appreciation (or tailwind under some interpretations) and a 30% reduction (or headwind) in asset prices over extreme four-year presidencies in our sample. We interpret the gap of national performance over these counterfactual returns as a proxy for the quality of domestic policies during a given presidency, as seen from the standpoint of equity investors. We apply this approach to seven Latin American countries from 1980 until 2011. From this perspective, Colombia, Peru and Chile stand out as the countries that have implemented the best long run policies over the sample. In addition, we provide a grading of relative presidential performance.