Uncertainty about Government Policy and Stock Prices

Lubos Pastor, Pietro Veronesi

NBER Working Paper No. 16128
Issued in June 2010, Revised in December 2011
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, Political Economy

We analyze how changes in government policy affect stock prices. Our general equilibrium model features uncertainty about government policy and a government that has both economic and non-economic motives. The government tends to change its policy after performance downturns in the private sector. Stock prices fall at the announcements of policy changes, on average. The price fall is expected to be large if uncertainty about government policy is large, as well as if the policy change is preceded by a short or shallow downturn. Policy changes increase volatility, risk premia, and correlations among stocks. The jump risk premium associated with policy decisions is positive, on average.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w16128

Published: Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, 08. citation courtesy of

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