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Political Uncertainty and Risk Premia
Lubos Pastor
University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Pietro Veronesi
University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
April 1, 2013
Abstract:
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.
Number of Pages in PDF File: 58
Keywords: political, uncertainty, government, risk premium, put, learning, Bayesian
JEL Classification: G12, G18
working papers series
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Date posted: September 24, 2011
; Last revised: April 2, 2013
Suggested CitationPastor, Lubos and Veronesi, Pietro, Political Uncertainty and Risk Premia (April 1, 2013). Available at SSRN: http://ssrn.com/abstract=1932420 or http://dx.doi.org/10.2139/ssrn.1932420
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