Term Spreads and Predictions of Bond and Stock Excess Returns
Dale L. Domian
York University - School of Administrative Studies
Baylor University - Department of Finance, Insurance & Real Estate
Financial Services Review, Vol. 7, No. 1
Several studies conclude that a long-short term spread, in conjunction with one or more other variables, jointly predict returns on long-term corporate bonds and stocks. We extend these studies by examining the predictive content of intermediate-short term spreads, and by examining regressions of excess returns on 1.5-year to 20-year Treasury bonds. We show that the bond market prices an intermediate-short term spread, and not a long-short spread. We believe individuals should vary their debt-equity mix with the level of a default risk premium or the stock market's dividend yield, and vary their debt portfolios' maturity with an intermediate-short term spread.
JEL Classification: G12, G14Accepted Paper Series
Date posted: September 3, 1998
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