The Effects of Inverted Yield Curves on Asset Returns

Posted: 16 Apr 1999

See all articles by James Ross McCown

James Ross McCown

University of Oklahoma - Division of Finance; Toltec Group


Between 1954 and 1991, U.S. stocks, long-term government bonds, and corporate bonds show negative risk premiums during periods preceded by inverted yield curves. Intermediate-term government bonds do not. Going from safer to riskier asset classes, the negative risk premiums increase in absolute value and statistical significance. The consumption CAPM offers a possible explanation for the negative risk premiums. A negative covariance between the growth rate of consumption and the premium on the risky assets will result in a negative risk premium. Empirical tests of the conditional covariance show that the consumption CAPM does not explain the phenomena.

JEL Classification: G12

Suggested Citation

McCown, James Ross, The Effects of Inverted Yield Curves on Asset Returns. Available at SSRN:

James Ross McCown (Contact Author)

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States

Toltec Group ( email )

Oklahoma City, OK
United States

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