Megaritis, Anastasios, Kontonikas, Alexandros, Vlastakis, Nikolaos ORCID: https://orcid.org/0000-0001-6411-7708 and Triantafyllou, Athanasios (2024) The term structure of interest rates as predictor of stock market volatility. International Journal of Finance and Economics. ISSN 1076-9307
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Abstract
We examine the forecasting power of the volatility of the slope of the US Treasury yield curve on US stock market volatility. Consistent with theoretical asset pricing models, we find that the volatility of the slope of the term structure of interest rates has significant forecasting power on stock market volatility for forecasting horizon ranging from 1 up to 12 months. Moreover, the term structure volatility has significant forecasting power when used for volatility predictions of the intra-day returns of S&P500 constituents, with the predictive power being higher for stocks belonging to the telecommunications and financial sector. Our forecasting models show that the forecasting power of yield curve volatility is higher to and absorbs that of Economic Policy Uncertainty and Monetary Policy Uncertainty, showing that the main channel through which the yield curve volatility affects the stock market is not only related with uncertainty about monetary policy actions or policy rates, but also with uncertainty regarding the future cash flows and dividend payments of US equities. Lastly, we show that the forecasting power of term structure volatility significantly increases during the post-2007 Great recession period which coincides with the Fed adopting unconventional monetary policies to stimulate the economy.
Item Type: | Article |
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Uncontrolled Keywords: | interest rates,monetary policy,slope,stock-market volatility,term spread,term structure |
Faculty \ School: | Faculty of Social Sciences > Norwich Business School |
UEA Research Groups: | Faculty of Social Sciences > Research Groups > Finance Group |
Depositing User: | LivePure Connector |
Date Deposited: | 23 Aug 2024 09:30 |
Last Modified: | 30 Nov 2024 01:44 |
URI: | https://ueaeprints.uea.ac.uk/id/eprint/96339 |
DOI: | 10.1002/ijfe.3029 |
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