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Wall street watches Washington: Asset pricing implications of policy uncertainty

Author

Listed:
  • Verhoeks, Ralph C.
  • Verschoor, Willem F.C.
  • Zwinkels, Remco C.J.

Abstract

We examine the effect of economic policy uncertainty (EPU) on sell-side analysts’ forecasts, the allocation of attention, and the stock market reaction to earnings news. We find that periods of high EPU are associated with higher analyst disagreement and a decrease in forecast accuracy. Specifically, we show that analysts issue on average more pessimistic forecasts when EPU is high. Second, we show that higher levels of EPU are associated with higher attention to the overall stock market and lower firm-level attention, in line with category learning behavior. Forecast errors also have a larger firm-specific component during periods of high EPU. Finally, we show that the trading volume and price responses to earnings announcements hardly depend on EPU. Hence, investors tend to follow analyst forecasts, thereby failing to incorporate a predictable bias.

Suggested Citation

  • Verhoeks, Ralph C. & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2024. "Wall street watches Washington: Asset pricing implications of policy uncertainty," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).
    • Handle: RePEc:eee:beexfi:v:41:y:2024:i:c:s2214635023000977
    DOI: 10.1016/j.jbef.2023.100883
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    More about this item

    Keywords

    Analyst forecasts; Earnings announcements; Economic policy uncertainty; Limited attention;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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