On the composition of government spending, optimal fiscal policy, and endogenous growth: Theory and evidence

In an endogenous growth model with two public services with differing productivities, this paper analytically characterises optimal fiscal policy for a decentralised economy, whereby the optimal values of the growth rate, tax rate and expenditure shares on the two public goods are linked directly to their productivity parameters. Using panel data for 15 developing countries over 28 years, we show using GMM techniques, that current (capital) spending has positive (negative) and significant effects on the growth rate, contrary to commonly held views. Our theoretical results extend, and our empirical results modify those obtained by Devarajan et al. (1996)

Liquidity effects due to information costs from changes

In this paper we examine effect on the returns of firms that have been included to and deleted from the FTSE 100 over the time period of 1984-2001. Like the S&P 500 listing studies, we find that the price and trading volume of newly listed (deleted) firms increases (decreases). The evidence is consistent with the information cost/liquidity explanation. This is because investors hold stocks with more (less) available information, consequently implying that they have lower (higher) trading costs. This explains the increase (decrease) in the stock price and trading volume of newly listed (deleted) stocks to (from) the FTSE 100 List

The impact of government expenditure on growth: Empirical evidence from a heterogeneous panel

This paper investigates the impact of government expenditure on growth, in a heterogeneous panel for 15 developing countries. Using GMM techniques, we show that countries with substantial government expenditure have strong growth effects, which vary considerably across the nations

Non-normality and recursive unit root test for PPP: Solving the PPP puzzle?

In this paper we carry out unit root tests on real exchange rates recursively as in Caporale et al (2003), but, following Arghyrou and Gregoriou (2007), we adjust the residuals for non-normality using a wild bootstrap method. The results are striking: the correction for non-normality dramatically increases the rejection percentages of the unit root null, and attenuates the erratic behaviour of the t-statistic, thus providing strong evidence in favour of PPP, and suggesting that such a correction might at least go some way towards solving the “PPP puzzle”

What happens around earning announcements? An investigation of information asymmetry and trading activity in the Saudi market

This paper examines stock returns and trading activities around earnings announcements for listed companies in the Saudi stock market (SSM). Specifically, we examine the levels of stock liquidity, trading activity, volatility, bid-ask spread, asymmetric information and investor trading behaviour around earnings announcements for all firms in the market for the period 2002-2009. Abnormal price and volume reactions around earnings announcements suggest that these announcements produce highly informative contents. The magnitude of the cumulative abnormal returns around earnings announcement is induced by trading activity in the two weeks before the release date. We also show evidence of an increased adverse selection cost around earnings announcement, which is then gradually reduced in the post-announcement period, indicating that earnings announcements reduce uncertainty in the market. We also examine trading behaviour among small and large investors in the market through constructing order imbalance measures. In general, large investors are more sophisticated and show higher informed trading before earnings announcements whereas smaller investors show stronger reaction to news. Moreover, small investors show a buying pattern which is consistent with times-series based earnings surprise. They are net-buyers for good news and net-sellers for bad news portfolios

Can market frictions really explain the price impact asymmetry of block trades? Evidence from the Saudi stock market

We empirically examine the price impact of block trades, in the Saudi Stock Market over the time period of 2005-2008. Using a unique dataset of intraday data consisting of 2.3 million block buys and 1.9 million block sales, we find an asymmetry in the price impact of block purchases and sales. The asymmetry persists even when we account for the bidask bias in block trades, which is contrary to the previous literature. Overall, our findings suggest that in an emerging market where institutional trading is relatively scarce, market microstructure cannot explain the asymmetry in the price impact of large trades

GMM and present value test of the C-CAPM under transactions costs: Evidence from the UK stock market

In this paper we test for the inclusion of the bid-ask spread in the consumption CAPM, in the UK stock market over the time period of 1980-2000. Two econometric models are used; first, Fisher’s (1994) asset pricing model is estimated by GMM, and secondly, the VAR approach proposed by Campbell and Shiller is extended to include the bid-ask spread. Overall the statistical tests are unable to reject the bid-ask spread as an independent explanatory variable in the C-CAPM. This leads to the conclusion that transactions costs should be included in asset pricing models

Is democracy beneficial for growth in countries with low ethnic diversity?

We study the impact of democracy on economic growth for a panel of the most and least ethnically diverse nations as documented by Easterly and Levine (1997). Using a GMM system to capture endogeneity and simultaneity, we find that democracy exerts a direct positive impact on growth, in addition to ameliorating the adverse effects of ethnic diversity on growth, unlike some of the results of the previous empirical literature

The composition of government spending and growth: Is current or capital spending better?

This article is available open access through the publisher’s website at the link below. Copyright @ 2008 Oxford University Press.In an endogenous growth framework with two public goods with differing productivities, this paper analytically characterizes optimal fiscal policy for a decentralized economy, whereby the optimal values of the growth rate, tax rate and expenditure shares on the two public goods are linked directly to their productivity parameters. Using panel data for 15 developing countries over 28 years, we show using GMM techniques, that current (capital) spending has positive (negative) and significant effects on the growth rate, contrary to commonly held views. For instance, spending on operations and maintenance has a stronger impact on growth than both health and education spending. We consider the various components on the revenue side of the government budget constraint to take into account possible omitted variable bias that could arise if tax revenue alone was considered

An empirical investigation of the relationship between the real economy and stock returns for the United States

This paper tests for the relationship between excess returns and economic growth rates in the U.S., using a Seemingly Unrelated Regression (SUR) approach. The system includes monthly data for inflation, consumption, narrow money supply and personal disposable income and each equation has up to 24-lagged Autoregressive terms. After removing the four major shocks associated with Black Monday, the Asian Crisis, “9·11” and its anniversary, we cannot find any ARCH behaviour in either the excess returns or the money series. The models are reduced to their parsimonious forms and the inflation and real consumption equations are corrected for ARCH. To make the result more robust we reduce our system to four equations by conditioning on income and testing the remaining equations for stability. The SUR model suggests strong long-run feedback between the financial sector and the real economy firstly through inflation, then consumption while the influence of real money supply appears transitory. Consumption is more sensitive to the economic variables in short and long run as compared with stock market windfalls