Does Budget Deficit Affect Stock Prices in Bangladesh?

Abstract

This study examines whether there is a long term relationship between budget deficit and stock price and if there is a causal flow between the variables in Bangladesh. Actual monthly budget deficit and monthly value of DSE general index data are considered here for the. period January 2007 to September 2012 with 61 observations in total. This study discovered that past information about budget deficit can be used to explain fluctuation in current stock price, suggesting causal flow from former to the latter. Moreover, causal flow from stock price to budget deficit is also observed.