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Market Timing of International Stock Markets using the Yield Spread

36 Pages Posted: 20 Jun 2002  

Bruce G. Resnick

Wake Forest University - Schools of Business

Gary L. Shoesmith

Wake Forest University - School of Business

Wendy Liu

Texas A&M University

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2002

Abstract

There has been much interest in recent years in the ex ante equity risk premium. Empirical studies indicate that it is possible for the ex ante equity risk premium to be negative and that it is related to an inverted yield curve of government bonds. This finding holds for the U.S. marketplace and for large foreign economies. Additionally, smaller countries have negative risk premiums in periods preceded by inverted U.S. yield curves. However, it remains an empirical question whether investors can form profitable trading strategies based on the relationship between the equity risk premium and the yield curve.

The present study extends recent probit modeling by Estrella and Mishkin (1996, 1998) for forecasting an economic recession. Specifically, we use the yield curve spread to forecast a bear stock market (negative ex ante market risk premium) in the U.S and eight major foreign stock markets. In general, it is found that the U.S. yield spread contains more important market timing information than does the home country yield spread for profitable market timing. The findings hold from the perspective of the local currency investor and the U.S. dollar investor investing in foreign stock markets. Overall our results support the possibility of a negative ex ante risk premium.

Suggested Citation

Resnick , Bruce G. and Shoesmith, Gary L. and Liu, Wendy, Market Timing of International Stock Markets using the Yield Spread (July 15, 2002). EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=314867 or http://dx.doi.org/10.2139/ssrn.314867

Bruce G. Resnick (Contact Author)

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7659
United States
336-758-4581 (Phone)
336-758-4514 (Fax)

Gary Lee Shoesmith

Wake Forest University - School of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States
336-758-5053 (Phone)
336-758-4514 (Fax)

HOME PAGE: http://business.wfu.edu/directory/gary-l-shoesmith/

Wei Liu

Texas A&M University ( email )

351E Wehner
College Station, TX 77843-4218
United States
979-458-4520 (Phone)

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