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The Stock Market Response to a "Regulatory Sine Curve"

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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.

Suggested Citation

  • Bo Sun & Xuan S. Tam & Eric Young, 2020. "The Stock Market Response to a "Regulatory Sine Curve"," International Finance Discussion Papers 1299, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1299
    DOI: 10.17016/IFDP.2020.1299
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    References listed on IDEAS

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    More about this item

    Keywords

    Cyclical financial regulation; Stock crash risk; Gradual boom and sudden crash;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K20 - Law and Economics - - Regulation and Business Law - - - General

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