Interest rate changes and the cross-section of global equity returns

Zaremba, Adam; Cakici, Nusret; Bianchi, Robert J.; Long, Huaigang

doi:10.1016/j.jedc.2023.104596

Cited by 6 publications

(1 citation statement)

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“…The Fed's disinflationary policy drives costs of borrowing, constraining liquidity that would discourage an appetite for new investments. Further, uncertainty regarding the possibility of future tightening of monetary policy will create fears that could lead to stock market volatility (Engle and Rangel 2008;Zaremba et al 2023) and increase the likelihood of a plunge in stock prices. On the other hand, investors who use bonds to hedge against downward movements in the stock market tend to move funds from the stock market to the bond market, bidding up bond prices.…”

Section: Introductionmentioning

confidence: 99%

Inflation, Equity Market Volatility, and Bond Prices: Evidence from G7 Countries

Chen,

Chiang,

Lin

2023

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This study examines the impacts of the US inflation rate on the bond prices of G7 countries across different maturities using inflation-induced equity market volatility (EMV) to better account for bond price determinants. The regression model, a GED-GARCH (1,1) procedure, is adopted to deal with the volatility clustering and fat tail features in bond return estimation. The testing results indicate that the inflation rate has a negative effect on bond returns across different maturities, although an exception occurs for longer maturities in Japan. Evidence shows that US inflation has a significant impact on bond returns for the non-US G7 countries. The negative effects from US inflation are more profound than those from the domestic market (expect in Japan). This study introduces the equity market volatility arising from inflation or the Fed’s interest rate change; this variable produces market volatility that has a positive effect on bond returns, offsetting part of the original negative effect from a rise in inflation.

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Section: Introductionmentioning

confidence: 99%