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Political uncertainty and risk premia

  • Pástor, Ľuboš
  • Veronesi, Pietro

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.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 110 (2013)
Issue (Month): 3 ()
Pages: 520-545

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Handle: RePEc:eee:jfinec:v:110:y:2013:i:3:p:520-545
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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