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Government investment and the stock market

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  • Belo, Frederico
  • Yu, Jianfeng

Abstract

High rates of government investment in public sector capital forecast high risk premiums both at the aggregate and firm-level. This result is in sharp contrast with the well-documented negative relationship between the private sector investment rate and risk premiums. To explain the empirical findings, we extend the neoclassical q-theory model of investment and specify public sector capital as an additional input in the firm's technology. We show that the model can quantitatively replicate the empirical facts with reasonable parameter values if public sector capital increases the marginal productivity of private inputs.

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  • Belo, Frederico & Yu, Jianfeng, 2013. "Government investment and the stock market," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 325-339.
    • Handle: RePEc:eee:moneco:v:60:y:2013:i:3:p:325-339
    DOI: 10.1016/j.jmoneco.2013.01.004
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    6. Hiraga, Kazuki & Kozuka, Masafumi & Miyazaki, Tomomi, 2018. "Public capital and asset prices: Time-series evidence from Japan," Finance Research Letters, Elsevier, vol. 25(C), pages 172-176.
    7. Li, Jun & Wang, Huijun & Yu, Jianfeng, 2018. "Aggregate Expected Investment Growth and Stock Market Returns," ADBI Working Papers 808, Asian Development Bank Institute.
    8. Ercolani, Valerio & Valle e Azevedo, João, 2014. "The effects of public spending externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 173-199.
    9. Croce, Mariano & Nguyen, Thien & Raymond, Steve, 2019. "Persistent Government Debt and Aggregate Risk Distribution," CEPR Discussion Papers 13922, C.E.P.R. Discussion Papers.
    10. Chen, Sheng-Syan & Chen, Yan-Shing & Liang, Woan-lih & Wang, Yanzhi, 2020. "Public R&D spending and cross-sectional stock returns," Research Policy, Elsevier, vol. 49(1).
    11. Miyazaki, Tomomi & Hiraga, Kazuki & Kozuka, Masafumi, 2024. "Stock market response to public investment under the zero lower bound: Cross-industry evidence from Japan," Journal of the Japanese and International Economies, Elsevier, vol. 71(C).
    12. Liu, Laura Xiaolei & Shu, Haibing & Wei, K.C. John, 2017. "The impacts of political uncertainty on asset prices: Evidence from the Bo scandal in China," Journal of Financial Economics, Elsevier, vol. 125(2), pages 286-310.
    13. Thien Nguyen, 2019. "Public Debt and the Slope of the Term Structure," 2019 Meeting Papers 957, Society for Economic Dynamics.
    14. Ravi Bansal & Mariano Max Croce & Wenxi Liao & Samuel Rosen, 2019. "Uncertainty-Induced Reallocations and Growth," NBER Working Papers 26248, National Bureau of Economic Research, Inc.
    15. Croce, M. & Nguyen, Thien T. & Raymond, S., 2021. "Persistent government debt and aggregate risk distribution," Journal of Financial Economics, Elsevier, vol. 140(2), pages 347-367.
    16. Corhay, Alexandre & Kind, Thilo & Kung, Howard & Morales, Gonzalo, 2021. "Discount rates, debt maturity, and the fiscal theory," SAFE Working Paper Series 323, Leibniz Institute for Financial Research SAFE.
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    18. Chrétien, Stéphane & Fu, Hsuan, 2023. "Presidential cycles in international equity flows and returns," Finance Research Letters, Elsevier, vol. 53(C).
    19. Mariano Max Croce & Thien T. Nguyen & Steve Raymond, 2019. "Persistent Government Debt and Aggregate Risk Distribution," NBER Working Papers 26177, National Bureau of Economic Research, Inc.
    20. Li, Jun & Wang, Huijun & Yu, Jianfeng, 2021. "Aggregate expected investment growth and stock market returns," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 618-638.
    21. Liu, Yang, 2023. "Government debt and risk premia," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 18-34.
    22. Anthony M. Diercks & William Waller, 2017. "Taxes and the Fed : Theory and Evidence from Equities," Finance and Economics Discussion Series 2017-104, Board of Governors of the Federal Reserve System (U.S.).
    23. Bretscher, Lorenzo & Hsu, Alex & Tamoni, Andrea, 2020. "Fiscal policy driven bond risk premia," Journal of Financial Economics, Elsevier, vol. 138(1), pages 53-73.
    24. Konstantinos Tsibikis & Jan Donders, 2020. "Fiscal Policy and Stock Market Efficiency in the Netherlands: An ARDL Bounds Testing Approach," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 10(9), pages 204-214, September.
    25. Schmid, Lukas & Croce, Mariano & Raymond, Steve & Nguyen, Thiên Tung, 2018. "Government Debt and the Returns to Innovation," CEPR Discussion Papers 12617, C.E.P.R. Discussion Papers.

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