Political Uncertainty and Risk Premia

Lubos Pastor and Pietro Veronesi

No 17464, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G01 G12 G18 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-cba, nep-cdm and nep-pol
Note: AP EFG POL
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published as Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.

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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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