Government Spending Shocks and Asset Prices

39 Pages Posted: 25 Jun 2016 Last revised: 12 Feb 2021

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Date Written: February 12, 2021

Abstract

The effects of government spending on consumption growth and the cross-sectional pricing of stocks depend on the state of the economy when the shock occurs. During times of high economic growth, government spending shocks lead to a drop in future consumption. To compensate for consumption disruptions, fluctuation averse investors command a risk premium for government spending shocks during high growth periods. In contrast, during low growth periods, government spending shocks have no impact on consumption and asset prices. I show that the results are unlikely to be influenced by omitted variables or erroneous classification of economic states.

Keywords: government spending shock, DMC returns, two-state model, factor model

JEL Classification: G12, E62, N42

Suggested Citation

Dissanayake, Ruchith, Government Spending Shocks and Asset Prices (February 12, 2021). 29th Australasian Finance and Banking Conference 2016, Available at SSRN: https://ssrn.com/abstract=2799778 or http://dx.doi.org/10.2139/ssrn.2799778

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

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