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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

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journal contribution
posted on 20.09.2018 by Rangan Gupta, Marian Risse, David A. Volkman, Mark Wohar
Given the existence of nonlinear relationship between equity premium and term spread, as well as pattern changes and the interaction of pattern changes with the term-spread and changes in the shape of the yield curve, we use a nonparametric k-th order causality-in-quantiles test to predict the movement in excess returns and volatility based on changes in the shape of the yield curve. With the test applied to over 250 years of monthly data for the UK covering the period 1753:08 to 2017:02, we find that pattern changes and the interaction of pattern changes with the term-spread, besides the term spread itself, tends to also play an important role in predicting volatility at the upper end of its conditional distribution. In addition, the effect on excess returns from term spread, pattern changes and the interaction is found to have improved markedly over time, barring at the conditional median of the equity premium. Finally, comparisons are made with historical data of the US and South Africa, and implications of our results are discussed.

History

School

  • Business and Economics

Department

  • Business

Published in

North American Journal of Economics and Finance

Citation

GUPTA, R. ... et al, 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, 47, pp. 391-405.

Publisher

© Elsevier

Version

AM (Accepted Manuscript)

Publisher statement

This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/

Acceptance date

14/05/2018

Publication date

2019

Notes

This paper was accepted for publication in the journal The North American Journal of Economics and Finance and the definitive published version is available at https://doi.org/10.1016/j.najef.2018.05.006

ISSN

1062-9408

Language

en

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