Journal of Finance Vol. 67 No. 4 2012
Uncertainty about Government Policy and Stock Prices
open access
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.
- DOI
- 10.1111/j.1540-6261.2012.01746.x
- Volume
- 67
- Issue
- 4
- Pages
- 1219-1264
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref