Research / BFI Working PaperSep 01, 2011

Political Uncertainty and Risk Premia

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.

More Research From These Scholars

BFI Working Paper Sep 3, 2020

Measuring the Cost of Living in Mexico and the US

David Argente, Chang-Tai Hsieh, Munseob Lee
Topics:  Uncategorized
BFI Working Paper Sep 13, 2021

An Industrial Organization Perspective on Productivity

Jan De Loecker, Chad Syverson
Topics:  Employment & Wages
BFI Working Paper Sep 3, 2020

Doubling Down on Debt: Limited Liability as a Financial Friction

Jesse Perla, Carolin Pflueger, Michal Szkup
Topics:  Uncategorized