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Can Debt Ceiling and Government Shutdown Predict US Real Stock Returns? A Boot-strap Rolling-Window Approach

Goodness Aye (), Mehmet Balcilar, Ghassen El Montasser, Rangan Gupta and Nangamso Manjezi ()
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Goodness Aye: Department of Economics, University of Pretoria, Pretoria, South Africa
Nangamso Manjezi: Department of Economics, University of Pretoria, Pretoria, South Africa

No 201426, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper investigates the in-sample predictability of debt ceiling and government shutdown for real stock returns in the U.S, using rolling window Granger non-causality estimation. Causal links often evolve over time so the use of the bootstrap rolling window approach will account for potential time variations in the relationships. We use monthly time series data on measures of debt ceiling and government shutdown, and real stock returns, covering the period of 1985:M2 to 2013:M9. Since the debt ceiling and government shutdown variables under analysis are exogenous, the use of the in-sample predictability to analyse the relationship running from debt ceiling to real stock returns, as well as, from government shutdown to real stock returns will provide evidence of not only whether in-sample predictability exists, but also how predictability varies over time i.e. significance in episodes of high values of index. The full sample bootstrap non-Granger causality test results suggests existence of no in-sample predictability of debt ceiling or government shutdown for real stock returns in the U.S. economy. The stability tests show evidence of parameter instability in the estimated equations. Therefore, we make use of the bootstrap rolling window (24 months) approach to investigate the changes in the in-sample predictability of the relationship, and detect significant in-sample predictability of debt ceiling and government shutdown for real stock returns at different sub-periods, corresponding especially after the phases where there were sharp increases in the indexes of debt ceiling and government shutdown.

Keywords: Debt ceiling; Government shutdown; real stock returns; Rolling Window; Bootstrap (search for similar items in EconPapers)
JEL-codes: C32 G18 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2014-06
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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