The term structure of interest rates as predictor of stock market volatility

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
Uncontrolled Keywords:	interest rates,monetary policy,slope,stock-market volatility,term spread,term structure
Faculty \ School:	Faculty of Social Sciences > Norwich Business School
Depositing User:	LivePure Connector
Date Deposited:	23 Aug 2024 09:30
Last Modified:	25 Sep 2024 18:02
URI:	https://ueaeprints.uea.ac.uk/id/eprint/96339
DOI:	10.1002/ijfe.3029

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