Political uncertainty and risk premia

Lubos Pastor and Pietro Veronesi

Journal of Financial Economics, 2013, vol. 110, issue 3, 520-545

Abstract: We develop a general equilibrium model of government policy choice in which stock prices respond to political news. The model implies that political uncertainty commands a risk premium whose magnitude is larger in weaker 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, especially when the economy is weak. We find empirical evidence consistent with these predictions.

Keywords: Political uncertainty; Government policy; Risk premia (search for similar items in EconPapers)
JEL-codes: G12 G18 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (879)

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Related works:
Working Paper: Political Uncertainty and Risk Premia (2011)
Working Paper: Political Uncertainty and Risk Premia (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:110:y:2013:i:3:p:520-545

DOI: 10.1016/j.jfineco.2013.08.007

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