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http://ssrn.com/abstract=2075375
 
 

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The Asset Pricing Implications of Government Economic Policy Uncertainty


Jonathan Brogaard


University of Washington - Department of Finance and Business Economics

Andrew L. Detzel


University of Washington Foster School of Business

June 1, 2014


Abstract:     
Using the Baker, Bloom, and Davis (2013) news-based measure to capture economic policy uncertainty (EPU) in the United States, we find that EPU positively forecasts log excess market returns. A one-standard deviation increase in EPU is associated with a 1.5% increase in forecasted 3-month abnormal returns (6.1% annualized). Furthermore, innovations in EPU earn a significant negative risk premium in the Fama French 25 size-momentum portfolios. Among the Fama French 25 portfolios formed on size and momentum returns, the portfolio with the greatest EPU beta underperforms the portfolio with the lowest EPU beta by 5.53% per annum, controlling for exposure to the Carhart four factors as well as implied and realized volatility. These findings suggest that EPU is an economically important risk factor for equities.

Number of Pages in PDF File: 53

Keywords: Political Uncertainty, Asset Pricing, Risk Premium

JEL Classification: F30, F50, G12, G15, G31, G38, H56, P16

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Date posted: June 4, 2012 ; Last revised: June 16, 2014

Suggested Citation

Brogaard, Jonathan and Detzel, Andrew L., The Asset Pricing Implications of Government Economic Policy Uncertainty (June 1, 2014). Available at SSRN: http://ssrn.com/abstract=2075375 or http://dx.doi.org/10.2139/ssrn.2075375

Contact Information

Jonathan Brogaard (Contact Author)
University of Washington - Department of Finance and Business Economics ( email )
Box 353226
Seattle, WA 98195
United States
Andrew L. Detzel
University of Washington Foster School of Business ( email )
Box 353200
Seattle, WA 98195
United States
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