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Political Uncertainty and Risk Premia

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  • Pástor, Luboš
  • Veronesi, Pietro

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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8601.

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Date of creation: Oct 2011
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Handle: RePEc:cpr:ceprdp:8601

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Keywords: Bayesian; government; learning; political; put; risk premium; uncertainty;

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References

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Citations

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Cited by:
  1. Bryan Kelly & Lubos Pastor & Pietro Veronesi, 2014. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," NBER Working Papers 19812, National Bureau of Economic Research, Inc.
  2. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2012. "Has Economic Policy Uncertainty Hampered the Recovery?," Working Papers 2012-003, Becker Friedman Institute for Research In Economics.
  3. Xiao-lin Li & Mehmet Balcilar & Rangan Gupta & Tsangyao Chang, 2013. "The Causal Relationship between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling-Window Approach," Working Papers 201345, University of Pretoria, Department of Economics.
  4. Croce, Mariano M. & Nguyen, Thien T. & Schmid, Lukas, 2012. "The market price of fiscal uncertainty," Journal of Monetary Economics, Elsevier, vol. 59(5), pages 401-416.
  5. Fabrice Roth, 2012. "Crise et régulation des marchés financiers : Quel impact sur les formes mutuelles dans l'assurance ?," Working Papers halshs-00692342, HAL.
  6. Wang, Yizhong & Chen, Carl R. & Huang, Ying Sophie, 2014. "Economic policy uncertainty and corporate investment: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 227-243.
  7. Belo, Frederico & Gala, Vito D. & Li, Jun, 2013. "Government spending, political cycles, and the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 107(2), pages 305-324.
  8. Nikolaos Antonakakis & Ioannis Chatziantoniou & George Filis, 2014. "Dynamic Spillovers of Oil Price Shocks and Policy Uncertainty," Department of Economics Working Papers wuwp166, Vienna University of Economics, Department of Economics.
  9. Brandon Julio & Youngsuk Yook, 2013. "Policy uncertainty, irreversibility, and cross-border flows of capital," Finance and Economics Discussion Series 2013-64, Board of Governors of the Federal Reserve System (U.S.).
  10. Tsangyao Chang & Wen-Yi Chen & Rangan Gupta & Duc Khuong Nguyen, 2013. "Are Stock Prices Related to Political Uncertainty Index in OECD Countries? Evidence from Bootstrap Panel Causality Test," Working Papers 2013-036, Department of Research, Ipag Business School.

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