Momentum Spillover from Government Bonds to Equity Markets

74 Pages Posted: 27 Dec 2019

See all articles by Adam Zaremba

Adam Zaremba

Poznań University of Economics and Business; University of Dubai

Robert J. Bianchi

Griffith University

Huaigang Long

Zhejiang University

Date Written: December 5, 2019

Abstract

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

Suggested Citation

Zaremba, Adam and Bianchi, Robert J. and Long, Huaigang, Momentum Spillover from Government Bonds to Equity Markets (December 5, 2019). Available at SSRN: https://ssrn.com/abstract=3498785 or http://dx.doi.org/10.2139/ssrn.3498785

Adam Zaremba (Contact Author)

Poznań University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

University of Dubai ( email )

Academic City
Dubai, 14143
United Arab Emirates

HOME PAGE: http://adamzaremba.pl/

Robert J. Bianchi

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

Huaigang Long

Zhejiang University ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058
China

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