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Uncertainty about Government Policy and Stock Prices

  • Lubos Pastor
  • Pietro Veronesi

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.

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File URL: http://www.nber.org/papers/w16128.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16128.

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Date of creation: Jun 2010
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Publication status: published as Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, 08.
Handle: RePEc:nbr:nberwo:16128
Note: AP EFG POL
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