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The term structure of interest rates as predictor of stock returns: Evidence for the IBEX 35 during a bear market

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Abstract
We present a model to forecast the probability of bear markets in the Spanish IBEX 35 with a congruent and concise parameterization which selects the explanatory factors from a wide set of variables like the yield curve of Spain, US and Europe, as well as several macro variables, and numerous leading indicators. To this end, we first use a data-guided algorithm to select an in-sample optimal Probit model that is employed as a benchmark. We then form alternative Probit models obtained from combinations of levels, slopes and/or curvatures in the yield curve of Spain, US and Europe, as well as several macro variables and compare their estimated probability of bear markets in the out-of-sample period with that from the benchmark model. Our results suggest that the slopes of US and Europe yield curves have some information content (not implicitly present in the slope of the Spanish yield curve) that helps to better forecast the probability of bear markets in the IBEX 35.

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  • Adrian Fernandez-Perez & Fernando Fernández-Rodríguez & Simón Javier Sosvilla Rivero, 2013. "The term structure of interest rates as predictor of stock returns: Evidence for the IBEX 35 during a bear market," Documentos de Trabajo del ICAE 2013-19, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    • Handle: RePEc:ucm:doicae:1319
    Note: Publicado en:International Review of Economics and Finance, 2014, Vol. 31 . pp. 21-33. Elsevier. doi:10.1016/j.iref.2013.12.004
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    Cited by:

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    2. Wu, Shue-Jen & Lee, Wei-Ming, 2015. "Intertemporal risk–return relationships in bull and bear markets," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 308-325.
    3. Mendes, Fernando Henrique de Paula e Silva & Caldeira, João Frois & Moura, Guilherme Valle, 2018. "Evidence of Bull and Bear Markets in the Bovespa index: An application of Markovian regime-switching Models with Duration Dependence," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 38(1), May.
    4. Chen, Mei-Ping & Chen, Pei-Fen & Lee, Chien-Chiang, 2014. "Frontier stock market integration and the global financial crisis," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 84-103.
    5. Umar, Zaghum & Riaz, Yasir & Shahab, Yasir & Teplova, Tamara, 2023. "Network connectedness of the term structure of yield curve and global Sukuks," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
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    7. Damir Tokic & Dave Jackson, 2023. "When a correction turns into a bear market: What explains the depth of the stock market drawdown? A discretionary global macro approach," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 184-197, May.
    8. Chen, Nan-Kuang & Chen, Shiu-Sheng & Chou, Yu-Hsi, 2017. "Further evidence on bear market predictability: The role of the external finance premium," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 106-121.
    9. Othman, Arshad Nuval & Masih, Mansur, 2014. "The different impact of conventional interest rates on Islamic stock market, Islamic banking and Islamic insurance: evidence from Malaysia," MPRA Paper 63285, University Library of Munich, Germany.
    10. Babajide Abiola Ayopo & Lawal Adedoyin Isola & Somoye Russel Olukayode, 2016. "Stock Market Response to Economic Growth and Interest Rate Volatility: Evidence from Nigeria," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 354-360.
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    12. Peiró, Amado, 2016. "Stock prices and macroeconomic factors: Some European evidence," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 287-294.
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    More about this item

    Keywords

    Term structure of interest rates; Stock returns; Trading strategies.;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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