Yield Curve Shifts and the Cross-Section of Global Equity Returns

52 Pages Posted: 27 Feb 2021 Last revised: 10 Jan 2022

See all articles by Adam Zaremba

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business

Nusret Cakici

Fordham university

Robert J. Bianchi

Griffith University; Griffith University

Huaigang Long

Zhejiang University

Date Written: June 4, 2021

Abstract

Interest rate changes typically affect equity value adversely. However, if investors react slowly, then the repricing may stretch over time. Using a century of data from sixty countries, we demonstrate that past yield curve shifts predict the cross-section of equity risk premia worldwide. The quintile of stock markets with the highest change in government bond yields underperforms the countries with the lowest change by 0.76% per month. The phenomenon is distinctly robust and cannot be explained by known risk factors. Furthermore, the low correlation with other cross return patterns paves the way for effective country allocation strategies.

Keywords: yield curve, government bonds, country equity indexes, interest rates, international markets, asset pricing, return predictability, the cross-section of stock returns

JEL Classification: G11, G12, G14, G15, N20

Suggested Citation

Zaremba, Adam and Cakici, Nusret and Bianchi, Robert J. and Bianchi, Robert J. and Long, Huaigang, Yield Curve Shifts and the Cross-Section of Global Equity Returns (June 4, 2021). Available at SSRN: https://ssrn.com/abstract=3756047 or http://dx.doi.org/10.2139/ssrn.3756047

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

Nusret Cakici

Fordham university ( email )

113 West 60th Street
New York, NY 10023
United States
2017473227 (Phone)
07446 (Fax)

Robert J. Bianchi

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

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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