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Uncertainty about Government Policy and Stock Prices
Author(s) -
PÁSTOR L̆UBOS̆,
VERONESI PIETRO
Publication year - 2012
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2012.01746.x
Subject(s) - economics , stock (firearms) , government (linguistics) , jump , recession , public policy , stock price , monetary economics , financial economics , macroeconomics , econometrics , mechanical engineering , paleontology , philosophy , linguistics , physics , quantum mechanics , series (stratigraphy) , biology , engineering , economic growth
ABSTRACT We analyze how changes in government policy affect stock prices. Our general equilibrium model features uncertainty about government policy and a government whose decisions have both economic and noneconomic motives. The model makes numerous empirical predictions. Stock prices should fall at the announcement of a policy change, on average. The price decline should be large if uncertainty about government policy is large, and also if the policy change is preceded by a short or shallow economic downturn. Policy changes should increase volatilities and correlations among stocks. The jump risk premium associated with policy decisions should be positive, on average.