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Political Uncertainty and Risk Premia

  • Lubos Pastor
  • Pietro Veronesi

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.

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File URL: http://www.nber.org/papers/w17464.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17464.

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Date of creation: Sep 2011
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Publication status: published as Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
Handle: RePEc:nbr:nberwo:17464
Note: AP EFG POL
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