IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Political Uncertainty and Risk Premia

  • Lubos Pastor

    (University of Chicago Booth School of Business)

  • Pietro Veronesi

    (University of Chicago Booth School of Business)

We analyze how changes in government policy affect stock prices. Our general equilibrium model features uncertainty about government policy and a government that has both economic and non-economic motives. The government tends to change its policy after performance downturns in the private sector. Stock prices fall at the announcements of policy changes, on average. The price fall is expected to be large if uncertainty about government policy is large, as well as if the policy change is preceded by a short or shallow downturn. Policy changes increase volatility, risk premia, and correlations among stocks. The jump risk premium associated with policy decisions is positive, on average.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2011-007.

in new window

Date of creation: 2011
Date of revision:
Handle: RePEc:bfi:wpaper:2011-007
Contact details of provider: Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Francisco Gomes & Alexander Michaelides & Valery Polkovnichenko, 2013. "Fiscal Policy and Asset Prices with Incomplete Markets," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 531-566.
  2. repec:cup:cbooks:9780521659123 is not listed on IDEAS
  3. Ellen R. McGrattan & Edward C. Prescott, 2005. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 767-796.
  4. Lubos Pastor & Pietro Veronesi, 2010. "Uncertainty about Government Policy and Stock Prices," NBER Working Papers 16128, National Bureau of Economic Research, Inc.
  5. Leonid Kogan & Stephen Ross & Jiang Wang & Mark Westerfield, 2003. "The Price Impact and Survival of Irrational Traders," NBER Working Papers 9434, National Bureau of Economic Research, Inc.
  6. Clemens Sialm, 2009. "Tax Changes and Asset Pricing," American Economic Review, American Economic Association, vol. 99(4), pages 1356-83, September.
  7. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  8. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who Adjusts and When? On the Political Economy of Reforms," NBER Working Papers 12049, National Bureau of Economic Research, Inc.
  9. Pástor, Luboš & Veronesi, Pietro, 2004. "Was There A Nasdaq Bubble in the Late 1990s?," CEPR Discussion Papers 4485, C.E.P.R. Discussion Papers.
  10. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
  11. Jinliang Li & Jeffery A. Born, 2006. "Presidential Election Uncertainty And Common Stock Returns In The United States," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(4), pages 609-622.
  12. Kevin A. Hassett & Gilbert E. Metcalf, 1998. "Investment With Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," Discussion Papers Series, Department of Economics, Tufts University 9823, Department of Economics, Tufts University.
  13. Cuoco, Domenico & Kaniel, Ron, 2009. "Equilibrium Prices in the Presence of Delegated Portfolio Management," CEPR Discussion Papers 7453, C.E.P.R. Discussion Papers.
  14. Bruno Strulovici, 2008. "Learning while voting: determinants of collective experimentation," Economics Papers 2008-W08, Economics Group, Nuffield College, University of Oxford.
  15. repec:dgr:rugsom:00c30 is not listed on IDEAS
  16. Dani Rodrik, 1989. "Policy Uncertainty and Private Investment in Developing Countries," NBER Working Papers 2999, National Bureau of Economic Research, Inc.
  17. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who Adjusts and When?The Political Economy of Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1.
  18. Maria Boutchkova & Hitesh Doshi & Art Durnev & Alexander Molchanov, 2012. "Precarious Politics and Return Volatility," Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 1111-1154.
  19. Thien Nguyen & Lukas Schmid & Howard Kung & Mariano Croce, 2012. "Fiscal Policies and Asset Prices," 2012 Meeting Papers 565, Society for Economic Dynamics.
  20. 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.
  21. Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2007. "The Excess Burden Of Government Indecision," Boston University - Department of Economics - Working Papers Series WP2007-004, Boston University - Department of Economics.
  22. Sialm, Clemens, 2006. "Stochastic taxation and asset pricing in dynamic general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 511-540, March.
  23. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  24. George Bittlingmayer, 1998. "Output, Stock Volatility, and Political Uncertainty in a Natural Experiment: Germany, 1880-1940," Journal of Finance, American Finance Association, vol. 53(6), pages 2243-2257, December.
  25. 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.
  26. Pantzalis, Christos & Stangeland, David A. & Turtle, Harry J., 2000. "Political elections and the resolution of uncertainty: The international evidence," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1575-1604, October.
  27. M. Max Croce & Howard Kung & Thien T. Nguyen & Lukas Schmid, 2012. "Fiscal Policies and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 25(9), pages 2635-2672.
  28. repec:cup:cbooks:9780521632935 is not listed on IDEAS
  29. Allan Drazen & William Easterly, 2001. "Do Crises Induce Reform? Simple Empirical Tests of Conventional Wisdom," Economics and Politics, Wiley Blackwell, vol. 13(2), pages 129-157, 07.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bfi:wpaper:2011-007. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Toni Shears)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.