Yield Curves and International Equity Returns

Posted: 2 Nov 2001

See all articles by James Ross McCown

James Ross McCown

University of Oklahoma - Division of Finance; Toltec Group


This paper examines empirical evidence on the international transmission of shocks to financial asset markets. The relationships between yield curves and risk premiums of stocks for eight industrialized countries are examined. Only the stocks of the three largest economies: Germany, Japan, and the USA, show negative risk premiums during periods preceded by the inverted yield curves of their respective government bonds. This is not the case for stocks of the five smaller countries in the sample. However, four of the five smaller countries have negative risk premiums in periods preceded by inverted German or US yield curves. This is consistent with the view that a world risk factor, captured by major country yield curves, affects the pricing of assets in smaller economies.

The consumption CAPM is unable to explain the phenomenon of the negative risk premiums. In almost all cases the conditional covariance between consumption growth and the risk premiums is statistically indifferent from zero.

Keywords: International asset pricing

JEL Classification: E43, E44, G15

Suggested Citation

McCown, James Ross, Yield Curves and International Equity Returns. Available at SSRN: https://ssrn.com/abstract=282426

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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