Government Spending Shocks and Asset Prices

48 Pages Posted: 25 Jun 2016 Last revised: 29 Apr 2019

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Date Written: April 27, 2019

Abstract

I explore asset pricing implications and macroeconomic dynamics of government spending shocks. Using an exogenous measure that is available at a higher frequency, I show that news shocks about government spending are priced in the cross-section of asset returns. The shock is priced in a combined cross-section of bond, commodity futures, and equity returns and is robust to controlling for political cycle and business cycle variations. Using vector autoregressions, I show that a positive news shock reduces economic policy and geopolitical uncertainties. Assets with high sensitivity to shocks have higher returns since they have higher payoffs during low uncertainty states.

Keywords: government spending shock, GMP returns, asset pricing model, factor model

JEL Classification: G12, E62, N42

Suggested Citation

Dissanayake, Ruchith, Government Spending Shocks and Asset Prices (April 27, 2019). 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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