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The Effect of Budget Deficits on Stock Market Returns in Emerging Markets: A Panel VAR Analysis

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  • Mehmet Sinan Çelik

Abstract

This study examines the impact of fiscal deficits on stock returns. The sample covers emerging markets for the period 2016Q1-2021Q4. The analysis results using panel vector autoregression (PVAR) and Granger causality tests indicate that fiscal deficits cause stock returns. These results are confirmed for countries with low and medium levels of financial development and for European countries. However, in countries with high levels of financial development such as the BRICS and ASEAN countries, no effect is observed. It is also found that this effect disappears during the COVID-19 pandemic. The results of the study question the strong form of the efficient market hypothesis (EMH). According to the EMH, stock prices should fully reflect all available information. However, the impact of fiscal deficits on stock returns in low- and middle-income countries and European countries suggests that market participants may not fully reflect this information, addressing the existence possibility of markets that are not efficient in the strong form.

Suggested Citation

  • Mehmet Sinan Çelik, 2024. "The Effect of Budget Deficits on Stock Market Returns in Emerging Markets: A Panel VAR Analysis," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 9(2), pages 336-345.
    • Handle: RePEc:ahs:journl:v:9:y:2024:i:2:p:336-345
    DOI: 10.30784/epfad.1446948
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    More about this item

    Keywords

    Budget Deficits; Stock Returns; Emerging Markets; COVID-19;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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