Government Spending News and Stock Price Index

Abstract

We investigate the effects of US federal spending news on the S&P 500 stock price index using a Mixed Frequency Time-Varying Parameters Factor Augmented Vector Autoregressive (MF-TVP-FAVAR) model. Unlike previous studies that rely on media coverage of spending changes and use indirect spending measures such as the budget deficit, we consider actual spending bills signed by the US President and compute the ensuing spending change using BIAS. We find a negative impact of spending news shock on the S&P 500 index which we verify using other stock price indices as well as estimates from a Bayesian VAR model.

Keywords: Spending News, Stock Price Index, FAVAR, Mixed frequencies.