Abstract
We investigate the causality between the real federal budget deficit returns and real stock market returns for the US economy. We divide the overall sample into two sub-samples running from 1968:1 to 1988:3 and from 1988:4 to 2011:3. In contrast to earlier studies, we find a significant positive relationship between real stock market returns and real federal budget deficit returns for both samples. Moreover, we find that the stochastic interrelations between these variables have considerably changed over time.
Notes
2 The Augmented–Dickey–Fuller-test statistics are −7.33 and −2.21 for the real Dow Jones 30 returns and real federal deficit returns, respectively. The critical values for the 5 and 10% significance levels are −1.94 and −1.62, respectively.
3 The multivariate LM test for serial correlation including 5 lags shows a p-value of 0.5797, whereas the multivariate Autoregressive Conditional Heteroscedasticity-Lagrange Multiplier test shows a p-value 0.6158 concerning sample 1. The corresponding figures regarding sample 2 are 0.8616 and 0.2912.