Returns to Public Debt: The US Federal Budget Deficit and the Cross Section of Equity Returns

46 Pages Posted: 18 Feb 2015

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Date Written: November 12, 2014

Abstract

This paper investigates the implications of changes in the US federal budget deficit for asset pricing. A portfolio-based risk factor related to changes in the budget deficit is formulated and its cross-sectional properties are analyzed. The average spread between equities exhibiting the highest negative cumulative impulse responses to shocks in the budget deficit and equities exhibiting the least sensitivity is found to be significantly negative. Traditional asset pricing cannot explain this pattern. The spread appears to be highly correlated with the business cycle and generates high payoffs when the economy is in a poor state.

Keywords: Asset pricing, US federal budget deficit, Equity returns, Macroeconomic risk

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus, Returns to Public Debt: The US Federal Budget Deficit and the Cross Section of Equity Returns (November 12, 2014). Available at SSRN: https://ssrn.com/abstract=2565746 or http://dx.doi.org/10.2139/ssrn.2565746

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

University of Jyväskyla ( email )

Jyväskyla
Finland

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