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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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  • Fernandez-Perez, Adrian
  • Fernández-Rodríguez, Fernando
  • Sosvilla-Rivero, Simón

Abstract

A Probit model to forecast the probability of bear markets in the Spanish IBEX 35 is presented, being the explanatory factors selected from a wide set of economic variables like the yield curve of Spain, US and Europe, several macro variables, and numerous leading indicators. A data-guided algorithm is used to render a concise parameterization of this optimal 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.

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  • Fernandez-Perez, Adrian & Fernández-Rodríguez, Fernando & Sosvilla-Rivero, Simón, 2014. "The term structure of interest rates as predictor of stock returns: Evidence for the IBEX 35 during a bear market," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 21-33.
    • Handle: RePEc:eee:reveco:v:31:y:2014:i:c:p:21-33
    DOI: 10.1016/j.iref.2013.12.004
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    13. 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.
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    More about this item

    Keywords

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

    JEL classification:

    • 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
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General

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