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The purpose of this study is to examine the bi-directional causality between political uncertainty and the market risk premium in the US.Design/methodology/approachI use a theoretical model to motivate signs and then check signs based on a vector autoregression.FindingsI find that political uncertainty has a small positive, delayed effect on the market risk premium. The market risk premium, on the other hand, has a large permanent, negative effect on political uncertainty.Originality/valueThis is the first research paper to consider the bi-directional effects of political uncertainty on the market risk premium and vice versa. It also finds interesting empirical results.
Managerial Finance – Emerald Publishing
Published: Apr 22, 2021
Keywords: Political uncertainty; Government policy; Risk premia; G12; G18
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