Uncertainty about Government Policy and Stock Prices

54 Pages Posted: 16 Jun 2010 Last revised: 6 Sep 2012

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)

Multiple version iconThere are 4 versions of this paper

Date Written: September 21, 2011

Abstract

We analyze how changes in government policy affect stock prices. Our general equilibrium model features uncertainty about government policy and a government whose decisions have both economic and non-economic motives. The model makes numerous empirical predictions. Stock prices should fall at the announcements of policy changes, on average. The price fall should be large if uncertainty about government policy is large, and also if the policy change is preceded by a short or shallow economic downturn. Policy changes should increase volatilities and correlations among stocks. The jump risk premium associated with policy decisions should be positive, on average.

Keywords: government, policy, uncertainty, learning, stock, price

JEL Classification: G01, G12, G14, G18

Suggested Citation

Pastor, Lubos and Veronesi, Pietro, Uncertainty about Government Policy and Stock Prices (September 21, 2011). Chicago Booth Research Paper No. 10-25; Fama-Miller Working Paper Series. Available at SSRN: https://ssrn.com/abstract=1625572

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-4080 (Phone)
773-702-0458 (Fax)

HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pietro Veronesi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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