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The Effects of Inverted Yield Curves on Asset Returns

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  • McCown, James Ross

Abstract

Between 1954 and 1991, U.S. stocks, long-term government bonds, and corporate bonds show negative risk premiums during periods preceded by inverted yield curves. Intermediate-term government bonds do not. Going from safer to riskier asset classes, the negative risk premiums increase in absolute value and statistical significance. The consumption CAPM offers a possible explanation for the negative risk premiums. A negative covariance between the growth rate of consumption and the premium on the risky assets will result in a negative risk premium. Empirical tests of the conditional covariance show that the consumption CAPM does not explain the phenomena. Copyright 1999 by MIT Press.

Suggested Citation

  • McCown, James Ross, 1999. "The Effects of Inverted Yield Curves on Asset Returns," The Financial Review, Eastern Finance Association, vol. 34(2), pages 109-126, May.
    • Handle: RePEc:bla:finrev:v:34:y:1999:i:2:p:109-26
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    Cited by:

    1. Gupta, Rangan & Risse, Marian & Volkman, David A. & Wohar, Mark E., 2019. "The role of term spread and pattern changes in predicting stock returns and volatility of the United Kingdom: Evidence from a nonparametric causality-in-quantiles test using over 250 years of data," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 391-405.
    2. Peter C. Dawson, 2015. "The capital asset pricing model in economic perspective," Applied Economics, Taylor & Francis Journals, vol. 47(6), pages 569-598, February.
    3. Ross McCown, James, 2001. "Yield curves and international equity returns," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 767-788, April.

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