Political Uncertainty and Risk Premia

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

No 8601, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the pricing of political uncertainty in a general equilibrium model of government policy choice. We find that political uncertainty commands a risk premium whose magnitude is larger in poorer economic conditions. Political uncertainty reduces the value of the implicit put protection that the government provides to the market. It also makes stocks more volatile and more correlated when the economy is weak. In addition, we find that government policies cannot be judged by the stock market response to their announcement. Announcements of deeper reforms tend to elicit less favorable stock market reactions.

Keywords: Bayesian; Government; Learning; Political; Put; risk premium; Uncertainty (search for similar items in EconPapers)
JEL-codes: G12 G18 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-cba, nep-cdm, nep-cis, nep-pol and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Journal Article: Political uncertainty and risk premia (2013)
Working Paper: Political Uncertainty and Risk Premia (2011)
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