It’s All Part of the Risk Perception: Tax News Shocks, Political Cycle, and Asset Prices

42 Pages Posted: 24 Aug 2018 Last revised: 11 Apr 2024

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Date Written: April 10, 2024

Abstract

A novel tax news shocks measure is constructed to examine the effects of tax changes on consumption and asset prices across the political cycle. The measure combines narrative tax policy pronouncements with stock return data to gauge the market’s valuation of tax news. Tax shocks elevate consumption, with a stronger effect under Republican presidents. Tax shocks, which reduce marginal utility of consumption, are associated with a positive premium. This premium is amplified during Republican administrations and periods of low perceived risk. These findings align with Pastor and Veronesi’s (2020) partisan model, implying time-varying risk aversion is linked to political cycles.

Keywords: Tax news, tax news shocks, asset pricing model, political cycle, time-varying risk aversion

JEL Classification: G12

Suggested Citation

Dissanayake, Ruchith, It’s All Part of the Risk Perception: Tax News Shocks, Political Cycle, and Asset Prices (April 10, 2024). 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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