The yield curve and the stock market: mind the long run

Gonçalo Faria; Fabio Verona

doi:10.1016/j.finmar.2019.100508

The yield curve and the stock market: mind the long run

Gonçalo Faria^*, Fabio Verona^*

^*Autor correspondente para este trabalho

Resultado de pesquisa › revisão de pares

21 Citações (Scopus)

Resumo

We extract cycles from the term spread and study their role for predicting the equity premium using linear models. When properly extracted, the trend of the term spread is a strong and robust out-of-sample equity premium predictor, both from a statistical and an economic point of view. It outperforms several variables recently proposed as good equity premium predictors. Our results support recent findings in the asset pricing literature that the low-frequency components of macroeconomic variables play a crucial role in shaping the dynamics of equity markets. Hence, for policymakers and financial market participants interested in gauging equity market developments, the trend of the term spread is a promising variable to look at.

Idioma original	English
Número do artigo	100508
Número de páginas	18
Revista	Journal of Financial Markets
Volume	50
DOIs	https://doi.org/10.1016/j.finmar.2019.100508
Estado da publicação	Publicado - set. 2020

Acesso ao documento

10.1016/j.finmar.2019.100508

http://hdl.handle.net/10400.14/29925

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http://www.scopus.com/inward/record.url?scp=85072191717&partnerID=8YFLogxK

CEGE: Research Center in Management and Economics
Silva, M. (Professor Catedrático), Sousa, R. (Professor Catedrático), Alves, P. (Professor Auxiliar), Madsen, A. (Professor Auxiliar Convidado), Lourenço, A. (Professor Associado), Carvalho, A. S. (Professor Associado), Andrade, A. (Professor Auxiliar), Silva, P. D. (Professor Associado), Vlačić, B. (Professor Auxiliar Convidado), Martins, C. (Professor Auxiliar Convidado), Gomes, C. (Investigador Auxiliar), Gevrek, Z. E. (Professor Auxiliar Convidado), Oliveira, F. G. D. (Professor Associado), Faria, G. (Professor Associado Convidado), Marreiros, H. (Bolseiro), Pinho, J. (Professor Auxiliar Convidado), Machado, J. (Professor Associado), Araújo, J. (Investigador Auxiliar), Pinto, J. (Professor Auxiliar), Rego, A. (Professor Catedrático), Gaspar, J. M. (Investigador Auxiliar), Corbo, L. (Professor Auxiliar Convidado), Costa, L. (Professor Associado), Fernandes, L. (Professor Auxiliar), Sottomayor, M. (Professor Auxiliar), Martins, N. (Professor Catedrático), Hernández-Marrero, P. (Investigador Auxiliar), Gonçalves, R. (Professor Associado), Ribeiro, R. (PI), Coelho, S. L. (Docente Assistente), Pereira, S. M. (Investigador Auxiliar), Silva, S. (Professor Associado), Rodrigues, V. (Professor Associado), Sotiros, D. G. (Investigador Auxiliar), Valverde, C. (Professor Auxiliar), Leitão, A. (Professor Auxiliar), Julião, J. (Professor Auxiliar), Tavares, M. (Professor Auxiliar), Lages, C. R. (Investigador Auxiliar), Elmashhara, M. G. (Investigador Auxiliar) & Teymourifar, A. (Investigador Auxiliar)
1/01/20 → 31/12/25
Projeto

Citação

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title = "The yield curve and the stock market: mind the long run",

abstract = "We extract cycles from the term spread and study their role for predicting the equity premium using linear models. When properly extracted, the trend of the term spread is a strong and robust out-of-sample equity premium predictor, both from a statistical and an economic point of view. It outperforms several variables recently proposed as good equity premium predictors. Our results support recent findings in the asset pricing literature that the low-frequency components of macroeconomic variables play a crucial role in shaping the dynamics of equity markets. Hence, for policymakers and financial market participants interested in gauging equity market developments, the trend of the term spread is a promising variable to look at.",

keywords = "Equity premium, Frequency domain, Predictability, Term spread",

author = "Gon{\c c}alo Faria and Fabio Verona",

note = "Funding Information: This is a revised version of the paper that circulated as “The equity risk premium and the low frequency of the term spread.” The authors thank Amit Goyal and Jussi Keppo for providing the data. We are also grateful for the useful comments of Tarun Chordia (the editor), an anonymous referee, Gene Ambrocio, S{\"o}hnke Bartram, Fabio Canova, Jos{\'e} Faias, Andr{\'e}s Fern{\'a}ndez, Amit Goyal, Eleonora Granziera, Agnieszka Jach, Esa Jokivuolle, Petri Jylh{\"a}, Kevin Lansing (discussant), Thomas Lubik, Ricardo Reis, Jorge Uribe (discussant), Michael Weber, as well as of participants at several conferences and seminars. The views expressed are those of the authors and do not necessarily reflect those of the Bank of Finland. Faria gratefully acknowledge financial support from Funda{\c c}{\~a}o para a Ci{\^e}ncia e a Tecnologia through project UID/GES/00731/2019. Publisher Copyright: {\textcopyright} 2019 Elsevier B.V.",

year = "2020",

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doi = "10.1016/j.finmar.2019.100508",

language = "English",

volume = "50",

journal = "Journal of Financial Markets",

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T2 - mind the long run

AU - Faria, Gonçalo

AU - Verona, Fabio

N1 - Funding Information: This is a revised version of the paper that circulated as “The equity risk premium and the low frequency of the term spread.” The authors thank Amit Goyal and Jussi Keppo for providing the data. We are also grateful for the useful comments of Tarun Chordia (the editor), an anonymous referee, Gene Ambrocio, Söhnke Bartram, Fabio Canova, José Faias, Andrés Fernández, Amit Goyal, Eleonora Granziera, Agnieszka Jach, Esa Jokivuolle, Petri Jylhä, Kevin Lansing (discussant), Thomas Lubik, Ricardo Reis, Jorge Uribe (discussant), Michael Weber, as well as of participants at several conferences and seminars. The views expressed are those of the authors and do not necessarily reflect those of the Bank of Finland. Faria gratefully acknowledge financial support from Fundação para a Ciência e a Tecnologia through project UID/GES/00731/2019. Publisher Copyright: © 2019 Elsevier B.V.

PY - 2020/9

Y1 - 2020/9

N2 - We extract cycles from the term spread and study their role for predicting the equity premium using linear models. When properly extracted, the trend of the term spread is a strong and robust out-of-sample equity premium predictor, both from a statistical and an economic point of view. It outperforms several variables recently proposed as good equity premium predictors. Our results support recent findings in the asset pricing literature that the low-frequency components of macroeconomic variables play a crucial role in shaping the dynamics of equity markets. Hence, for policymakers and financial market participants interested in gauging equity market developments, the trend of the term spread is a promising variable to look at.

AB - We extract cycles from the term spread and study their role for predicting the equity premium using linear models. When properly extracted, the trend of the term spread is a strong and robust out-of-sample equity premium predictor, both from a statistical and an economic point of view. It outperforms several variables recently proposed as good equity premium predictors. Our results support recent findings in the asset pricing literature that the low-frequency components of macroeconomic variables play a crucial role in shaping the dynamics of equity markets. Hence, for policymakers and financial market participants interested in gauging equity market developments, the trend of the term spread is a promising variable to look at.

KW - Equity premium

KW - Frequency domain

KW - Predictability

KW - Term spread

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VL - 50

JO - Journal of Financial Markets

JF - Journal of Financial Markets

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ER -

The yield curve and the stock market: mind the long run

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CEGE: Research Center in Management and Economics

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