Stock Market Fluctuations and the Term Structure

Posted: 8 Jul 1998

See all articles by Chunsheng Zhou

Chunsheng Zhou

Peking University - Guanghua School of Management - Finance

Date Written: January 24, 1996


This paper uses the term structure of interest rates to explain the variations of stock prices and stock returns. It shows that interest rates have an important impact on stock returns, especially at long horizons. The hypothesis that expected stock returns move one-for-one with ex ante interest rates, which has been rejected strongly in other studies using short horizon data, is supported by long horizon data. The paper proposes, for the first time, a single measure---the present value of forward interest rates---to summarize the information of the term structure that is useful in characterizing the comovements of the equity market and the bond market, and finds that such a single measure explains a significant part of variation in dividend-price ratios. The paper also suggests that the high volatility of the stock market is related to the high volatility of long-term bond yields and may be accounted for by changing forecasts of discount rates. The findings of this paper are quite different from the typical findings of the previous work and may provide a reasonable economic explanation for the predictability of long-horizon stock returns.

JEL Classification: G1

Suggested Citation

Zhou, Chunsheng, Stock Market Fluctuations and the Term Structure (January 24, 1996 ). Available at SSRN:

Chunsheng Zhou (Contact Author)

Peking University - Guanghua School of Management - Finance ( email )

Beijing, 100871
8610-62768188 (Phone)
8610-62768266 (Fax)

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