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The Stock Market Response to a "Regulatory Sine Curve"

Bo Sun (), Xuan S. Tam () and Eric Young ()

No 1299, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We construct new indicators of financial regulatory intensity and find evidence that a "regulatory sine curve" generally exists: regulatory oversight increases following a recession and wanes as the economy returns to normalcy. We then build an asset pricing model, based on the idea that regulatory oversight both deters incentives to commit fraud ex ante and reveals hidden negative information ex post. Our calibration suggests that these mechanisms can be quantitatively important for stock price dynamics.

Keywords: Cyclical financial regulation; Stock crash risk; Gradual boom and sudden crash (search for similar items in EconPapers)
JEL-codes: G12 G30 K20 (search for similar items in EconPapers)
Pages: 48
Date: 2020-09-18
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1299

DOI: 10.17016/IFDP.2020.1299

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