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Uncertainty about Government Policy and Stock Prices

Author

Listed:
  • Pietro Veronesi

    (Chicago Booth)

  • Lubos Pastor

    (Univ of Chicago)

Abstract

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.

Suggested Citation

  • Pietro Veronesi & Lubos Pastor, 2011. "Uncertainty about Government Policy and Stock Prices," 2011 Meeting Papers 86, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:86
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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