The Term Structure of Interest Rates as Predictor of Stock Returns: Evidence for the IBEX 35 During a Bear Market

29 Pages Posted: 17 Jun 2013

See all articles by Adrian Fernandez-Perez

Adrian Fernandez-Perez

Auckland University of Technology

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: June 3, 2013

Abstract

We present a model to forecast the probability of bear markets in the Spanish IBEX 35 with a congruent and concise parameterization which selects the explanatory factors from a wide set of variables like the yield curve of Spain, US and Europe, as well as several macro variables, and numerous leading indicators.

To this end, we first use a data-guided algorithm to select an in-sample optimal Probit model that is employed as a benchmark. We then form alternative Probit models obtained from combinations of levels, slopes and/or curvatures in the yield curve of Spain, US and Europe, as well as several macro variables and compare their estimated probability of bear markets in the out-of-sample period with that from the benchmark model. Our results suggest that the slopes of US and Europe yield curves have some information content (not implicitly present in the slope of the Spanish yield curve) that helps to better forecast the probability of bear markets in the IBEX 35.

Keywords: Term structure of interest rates, Stock returns, Trading strategies

JEL Classification: E43, G15, C20

Suggested Citation

Fernandez-Perez, Adrian and Fernández Rodríguez, Fernando and Sosvilla-Rivero, Simon, The Term Structure of Interest Rates as Predictor of Stock Returns: Evidence for the IBEX 35 During a Bear Market (June 3, 2013). Available at SSRN: https://ssrn.com/abstract=2280024 or http://dx.doi.org/10.2139/ssrn.2280024

Adrian Fernandez-Perez

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 9 921 9999 (Phone)
+64 9 921 9940 (Fax)

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

Campus de Tafira
E-35017 Las Palmas
Spain
+34 928 45 18 02 (Phone)
+34 928 45 18 29 (Fax)

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

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