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Cross-Policy Risk Pricing

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Abstract

We show that interactions across government policies affect firms’ cost of equity capital. Exploiting the 2018–2019 U.S. tariff shocks and concurrent federal procurement spending, we find that firms facing higher tariff exposure earn higher subsequent risk premia, but this effect is substantially attenuated for firms receiving greater procurement. A one-standard-deviation increase in procurement attenuates about two-thirds of the tariff-related risk premium. Procurement is relatively more favorable for politically connected and economically vulnerable firms. Larger procurement inflows also attenuate tariff-induced declines in subsequent earnings. Together, these findings reveal a form of fiscal insurance in which government procurement partially offsets the financing and real consequences of tariff exposure.

Suggested Citation

  • Leslie Sheng Shen & Nancy R. Xu, 2026. "Cross-Policy Risk Pricing," Working Papers 26-13, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:103725
    DOI: 10.29412/res.wp.2026.13
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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