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Published in: Journal of Economics and Finance 4/2020

29-05-2020

The U.S. term structure and return volatility in emerging stock markets

Authors: Riza Demirer, Asli Yuksel, Aydin Yuksel

Published in: Journal of Economics and Finance | Issue 4/2020

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Abstract

This paper examines the predictive power of the U.S. term structure over return volatility in emerging stock markets. Decomposing the term structure of U.S. Treasury yields into two components, the expectations factor and the maturity premium, we show that the U.S. term structure indeed contains predictive information over emerging stock market volatility, even after controlling for country specific factors including turnover and market size. While we observe heterogeneous patterns across emerging markets in terms of their predictability with respect to the U.S. term structure, we find that the market’s expectation of future short term rates, implied by the expectations factor, serves as a stronger predictor of stock market volatility compared to the maturity premium component of the yield spread. We also find that the U.S. term structure has gained further predictive value following the global financial crisis, particularly for the BRICS nations of China, Russia, and S. Africa. Overall, our findings suggest that policymakers and investors can utilize interest rate signals from the U.S. Treasury yields to make projections over stock market volatility in their local markets, however, distinguishing between the two components of the yield curve could provide additional forecasting power depending on the country of focus.
Footnotes
1
Although the expectations hypothesis assumes that the maturity premium is constant, numerous studies in the literature have provided evidence challenging its validity (e.g. Fama and Bliss 1987; Campbell and Shiller 1991, among others).
 
2
For brevity, we present in Table 4 the findings based on the 60–3 month yield spread only; however, we get similar results when the term structure variables are computed using 12–3 and 36–3 month spreads (available upon request).
 
3
Following unit root tests, turnover is used in levels, while first differences are used for the other control variables.
 
4
Although not reported, similar results are obtained from alternative model specifications when control variables are employed in various combinations. The additional results are available upon request.
 
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Metadata
Title
The U.S. term structure and return volatility in emerging stock markets
Authors
Riza Demirer
Asli Yuksel
Aydin Yuksel
Publication date
29-05-2020
Publisher
Springer US
Published in
Journal of Economics and Finance / Issue 4/2020
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI
https://doi.org/10.1007/s12197-020-09511-x

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