Do Members of Congress Beat the Market?

A balanced look at academic studies of congressional stock trading: early evidence of outperformance, later work that contradicts it, and what it means for copy-trading politicians.

"Congress beats the market" is one of the most repeated claims in personal finance. The evidence is more mixed than the headlines suggest, and the answer depends on the period studied, the method and whether you look at trades or at whole portfolios.

The studies that found an edge

• Senate, 1993 to 1998 (Ziobrowski and co-authors, 2004). Looking at US Senators' common stock transactions, the authors reported that a portfolio mimicking their purchases outperformed the market by roughly 12 percentage points a year.
• House, 1985 to 2001 (Ziobrowski and co-authors, 2011). Representatives' stock purchases earned significant positive abnormal returns too, but smaller: about 55 basis points per month (roughly 6% a year) in a mimicking portfolio, based on more than 16,000 transactions by around 300 members.

Both studies were influential because they suggested politicians trade with an information advantage.

The studies that did not

• Eggers and Hainmueller, "Capitol Losses" (2013). Reinterpreting the earlier studies and adding their own analysis of 2004 to 2008, they concluded that members of Congress did not trade with an information advantage in either period. Looking at whole portfolios rather than individual trades, they found the average member would have earned higher returns in a passive index fund, underperforming by roughly 2 to 3 percent a year.

The disagreement is partly methodological. Studying individual buys can show timing skill that disappears once you account for everything else the person holds.

Why the answer is unclear

1. Different periods. The studies cover years before the STOCK Act in 2012, when disclosure rules were looser.
2. Delay. Since the STOCK Act, a trade can be disclosed up to 45 days later. A strategy that copies a trade after disclosure is not the same as the trade itself. See how Congress trades are disclosed.
3. Ranges. Amounts are reported in bands, not exact values, so portfolio weights are estimates.
4. Who is trading. Many trades are by spouses, advisers or managed accounts.
5. Selection. A handful of high-profile cases get attention, which skews the impression of the average member.

What this means in practice

The honest summary: there is evidence of outperformance in some historical samples and evidence against it in others. Nobody should assume that following a politician's disclosure is a reliable edge, especially once the delay is taken into account.

Where Congress data is more useful is as one input among several. When a stock appears in congressional disclosures and several insiders are buying and funds are adding positions per their 13F filings, the overlap is a better reason to research a company than any one source alone.

Sources

• Ziobrowski, Cheng, Boyd and Ziobrowski, "Abnormal Returns from the Common Stock Investments of the U.S. Senate", Journal of Financial and Quantitative Analysis, 2004.
• Ziobrowski, Boyd, Cheng and Ziobrowski, "Abnormal Returns from the Common Stock Investments of Members of the U.S. House of Representatives", Business and Politics, 2011.
• Eggers and Hainmueller, "Capitol Losses: The Mediocre Performance of Congressional Stock Portfolios", 2013.
• Jeng, Metrick and Zeckhauser, "Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective", 2003.

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