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Political uncertainty and risk premia

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  • Pástor, Ľuboš
  • Veronesi, Pietro

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.

Suggested Citation

  • Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
  • Handle: RePEc:eee:jfinec:v:110:y:2013:i:3:p:520-545
    DOI: 10.1016/j.jfineco.2013.08.007
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    More about this item

    Keywords

    Political uncertainty; Government policy; Risk premia;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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