The Asset Pricing Implications of Government Economic Policy Uncertainty
University of Washington - Department of Finance and Business Economics
Andrew L. Detzel
University of Washington Foster School of Business
Using a search-based measure to capture economic policy uncertainty for 21 countries, we find that when economic policy uncertainty increases by 1%, contemporaneous market returns fall by 2.9% and market volatility increases by 18%. An economic policy uncertainty factor-mimicking portfolio earns positive abnormal returns of 70 basis points per month and market-wide equity risk premiums increase for at least two years. Aggregate cash flows, especially private investment experience a level shift downward but return to normal growth rates after one quarter. Our results suggest that indecisiveness in government economic policymaking has material and long-lasting real and financial implications.
Number of Pages in PDF File: 51
Keywords: Political Uncertainty, Asset Pricing, Risk Premium
JEL Classification: F30, F50, G12, G15, G31, G38, H56, P16working papers series
Date posted: June 4, 2012 ; Last revised: November 18, 2012
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