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 Jun 29, 2020

Can Technology Solve the Principal-Agent Problem? Evidence from China’s War on Air Pollution

Michael Greenstone, Guojun He, Ruixue Jia, Tong Liu
Topics:  Energy & Environment
BFI Working Paper Jan 13, 2021

Outsourcing, Inequality and Aggregate Output

Adrien Bilal, Hugo Lhuillier
Topics:  Employment & Wages, Industrial Organization
BFI Working Paper Jan 25, 2022

The Second World War, Inequality and the Social Contract in England

Leander Heldring, James Robinson, Parker J. Whitfill
Topics:  Economic Mobility & Poverty