Tax News Shocks, Political Cycles, and Asset Prices

51 Pages Posted: 24 Aug 2018 Last revised: 4 Feb 2020

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Date Written: February 4, 2020

Abstract

Using two instruments of perceived probabilities of income tax changes, I show that the implications of tax news shocks on the economy and asset prices are asymmetric across the political partisan cycle. Tax shocks cause high wealth states during Republican administrations. To compensate for high amount of systematic risk during Republican terms, investors command a premium to hold assets that co-vary positively with tax shocks. In contrast, the wealth effect and premium for tax shocks are trivial during Democratic regimes. An investment strategy that exploits the time-varying premium across the political cycle generates significant returns over commonly used factor models.

Keywords: Tax Shock, Asset Pricing Model, Political Cylce

JEL Classification: G12

Suggested Citation

Dissanayake, Ruchith, Tax News Shocks, Political Cycles, and Asset Prices (February 4, 2020). Available at SSRN: https://ssrn.com/abstract=3230565 or http://dx.doi.org/10.2139/ssrn.3230565

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

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