Term Spreads and Predictions of Bond and Stock Excess Returns

Posted: 3 Sep 1998

See all articles by Dale L. Domian

Dale L. Domian

Memorial University of Newfoundland (MNU); York University - School of Administrative Studies

William Reichenstein

Baylor University - Department of Finance, Insurance & Real Estate

Abstract

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, G14

Suggested Citation

Domian, Dale L. and Domian, Dale L. and Reichenstein, William, Term Spreads and Predictions of Bond and Stock Excess Returns. Available at SSRN: https://ssrn.com/abstract=121108

Dale L. Domian (Contact Author)

Memorial University of Newfoundland (MNU)

Faculty of Business Administration
St. John's, Newfoundland A1B 3X5
Canada
709-737-4632 (Phone)
709-737-7680 (Fax)

York University - School of Administrative Studies ( email )

Toronto, Ontario M3J 1P3
Canada
416-736-2100, x20009 (Phone)
416-736-5963 (Fax)

William Reichenstein

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-6146 (Phone)
254-710-1092 (Fax)

HOME PAGE: http://hsb.baylor.edu/html/Reichens/Home.htm

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