Momentum Spillover from Government Bonds to Equity Markets
74 Pages Posted: 27 Dec 2019
Date Written: December 5, 2019
We investigate the momentum spillover effect from government bonds to their respective equity markets. Using a unique long-run dataset of 61 countries for the years 1900–2019, we demonstrate that past bond yield changes positively predict future stock index returns in the cross-section. The quintile of countries with the largest decline (or smallest increase) in government bond yields outperforms the quintile of countries with the smallest decline (or largest increase) by 0.63% per month. The effect is robust to many considerations. Our findings support the hypothesis that investors underreact to changes in government bond yields. Finally, we show that global investors can employ this bond momentum spillover effect to enhance international asset allocation decisions.
Keywords: government bonds, equity indices, momentum spillover, international markets, asset pricing, equity anomalies, return predictability, the cross-section of stock returns
JEL Classification: G11, G12, G15, N20
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