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Political Uncertainty and Risk Premia

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  • Veronesi, Pietro
  • Pástor, LuboÅ¡

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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  • Veronesi, Pietro & Pástor, LuboÅ¡, 2011. "Political Uncertainty and Risk Premia," CEPR Discussion Papers 8601, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8601
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    More about this item

    Keywords

    Bayesian; Government; Learning; Political; Put; risk premium; Uncertainty;
    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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