Uncertainty about Government Policy and Stock Prices

Pietro Veronesi and Pástor, Luboš
Authors registered in the RePEc Author Service: Lubos Pastor

No 7897, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Government; Learning; Stock; Uncertainty (search for similar items in EconPapers)
JEL-codes: G01 G12 G14 G18 (search for similar items in EconPapers)
Date: 2010-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Uncertainty about Government Policy and Stock Prices (2012)
Working Paper: Uncertainty about Government Policy and Stock Prices (2011)
Working Paper: Uncertainty about Government Policy and Stock Prices (2010)
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