Effect of Public Debt on Equity Prices
DOI:
https://doi.org/10.33423/jaf.v24i3.7115Keywords:
accounting, finance, public debt, treasury, rationality, equity price, vector-autoregression, structural vector-autoregression, impulse response function, Granger CausalityAbstract
With the growing debt harbored by the United States becoming harder to sustain, one believes it is imperative to research the effect of increases in public debt and events related to debt management policy on our financial system. In fleshing out this relationship, this paper can supplement the literature surrounding the development of nations through marketable debt products, the behavior of our financial markets and proper public debt management. This study considers the rationality of the market, as it is influenced by this exogenous variable over time, and how that relates to an equity’s price movements. Utilizing a vector-autoregression and structural vector-autoregression estimated with OLS, I will determine how events related to public debt affect equities.
References
Amisano, G., & Giannini, C. (1997). From VAR models to structural VAR. In Topics in structural VAR econometrics (pp. 1–26). Springer-Verlag.
Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. The Journal of Economic Perspectives, 21(2), 129–151. Retrieved from http://www.jstor.org/stable/30033721
Blanchard, O.J., & Quah, D. (1989). The dynamic effects of aggregate demand and supply disturbances. The American Economic Review, 79(4), 655–673. Retrieved from http://www.jstor.org/stable/1827924
Connolly, R., Stivers, C., & Sun, L. (2005). Stock market uncertainty and the stock-bond return relation. The Journal of Financial and Quantitative Analysis, 40(1), 161–194. Retrieved from http://www.jstor.org/stable/27647190
Financial Times. (2023, June 2). The world’s public debt problem. Retrieved from https://www.ft.com/content/c8f5ba07-1d74-4dce-a9b6-983e4e5380e1
Fiscal Data explains the national debt. (2023). Understanding the national debt | U.S. Treasury Fiscal Data. Retrieved from https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
Gaspar, V., Poplawski-Ribeiro, M., & Yoo, J. (2023, September 13). Global debt is returning to its rising trends. International Monetary Fund. Retrieved from https://www.imf.org/en/Blogs/Articles/2023/09/13/global-debt-is-returning-to-its-rising-trend#:~:text=Forces%20in%20debt%20trends&text=Global%20public%20debt%20tripled%20since,span%20between%201960%20and%202022
Lütkepohl, H. (2005). Structural VARs and VECMs. In New introduction to multiple time series analysis (pp. 358–400). Springer-Verlag.
Muth, J.F. (1961). Rational expectations and the theory of price movements. Econometrica, 29(3), 315–335. https://doi.org/10.2307/1909635
Reinhart, V., Sack, B., & Heaton, J. (2000). The economic consequences of disappearing government debt. Brookings Papers on Economic Activity, (2), 163–220. Retrieved from http://www.jstor.org/stable/2667358
Roley, V.V. (1982). The effect of federal debt-management policy on corporate bond and equity yields. The Quarterly Journal of Economics, 97(4), 645–668. https://doi.org/10.2307/1885104
Stock, J.H., & Watson, M.W. (2001). Vector autoregressions. The Journal of Economic Perspectives, 15(4), 101–115. Retrieved from http://www.jstor.org/stable/2696519
Stock, J.H., & Watson, M.W. (2011). Introduction to time series regression and forecasting. In Introduction to econometrics (3rd Ed., pp. 516–569). Addison-Wesley.
