The Stock Market Response to a "Regulatory Sine Curve"

48 Pages Posted: 28 Sep 2020

See all articles by Bo Sun

Bo Sun

Board of Governors of the Federal Reserve System

Xuan S. Tam

City University of Hong Kong

Eric R. Young

University of Virginia

Date Written: September, 2020

Abstract

We construct new indicators of financial regulatory intensity and find evidence that a "regulatory sine curve" generally exists: regulatory oversight increases following a recession and wanes as the economy returns to normalcy. We then build an asset pricing model, based on the idea that regulatory oversight both deters incentives to commit fraud ex ante and reveals hidden negative information ex post. Our calibration suggests that these mechanisms can be quantitatively important for stock price dynamics.

Keywords: Cyclical financial regulation, Stock crash risk, Gradual boom and sudden crash

JEL Classification: G12, G30, K20

Suggested Citation

Sun, Bo and Tam, Xuan S. and Young, Eric R., The Stock Market Response to a "Regulatory Sine Curve" (September, 2020). FRB International Finance Discussion Paper No. 1299, Available at SSRN: https://ssrn.com/abstract=3699468 or http://dx.doi.org/10.17016/IFDP.2020.1299

Bo Sun (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Xuan S. Tam

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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