Uncertainty About Government Policy and Stock Prices

62 Pages Posted: 29 Jun 2010 Last revised: 26 Jan 2023

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business

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: June 2010

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

Pastor, Lubos and Veronesi, Pietro, Uncertainty About Government Policy and Stock Prices (June 2010). NBER Working Paper No. w16128, Available at SSRN: https://ssrn.com/abstract=1630133

Lubos Pastor (Contact Author)

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Pietro Veronesi

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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