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Title: Uncertainty about Government Policy and Stock Prices

Author(s): Lubos P�stor and Pietro Veronesi

Publication Date: June 2010

Keyword(s): government, learning, stock and uncertainty

Programme Area(s): Financial Economics

Abstract: 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.

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Bibliographic Reference

P�stor, L and Veronesi, P. 2010. 'Uncertainty about Government Policy and Stock Prices'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7897