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Fiscal policy and stock market efficiency: An ARDL Bounds Testing approach

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  • Stoian, Andreea
  • Iorgulescu, Filip

Abstract

The aim of this paper is to investigate the semi-strong market efficiency hypothesis with respect to fiscal policy information, in the context of the Bucharest Stock Exchange. Taking into account that macroeconomic data series of emerging countries usually have a limited size and may be plagued by inconsistencies and structural breaks, this paper proposes an ARDL Bounds testing approach for studying the relationship between stock returns and lagged macroeconomic variables. Moreover, this approach allows us to examine both the long and short-term relationship between fiscal policy and stock returns. The results indicate that, in the long run, stock prices fully and efficiently reflect information on past fiscal policy. However, in the short run, the Romanian stock market reacts efficiently only to unexpected fiscal policy news, while anticipated fiscal policy information displays a significant lagged relationship with current stock returns. In addition, the results also showed that monetary policy information is not incorporated efficiently into stock prices, both in the short and the long run, and its impact on stock returns is larger than the one exerted by fiscal policy.

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  • Stoian, Andreea & Iorgulescu, Filip, 2020. "Fiscal policy and stock market efficiency: An ARDL Bounds Testing approach," Economic Modelling, Elsevier, vol. 90(C), pages 406-416.
    • Handle: RePEc:eee:ecmode:v:90:y:2020:i:c:p:406-416
    DOI: 10.1016/j.econmod.2019.12.023
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    More about this item

    Keywords

    Fiscal policy; Stock returns; Efficient market hypothesis; ARDL Bounds Testing;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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