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The Effects of Inverted Yield Curves on Asset Returns
Author(s) -
McCown James Ross
Publication year - 1999
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1999.tb00457.x
Subject(s) - risk premium , capital asset pricing model , economics , bond , econometrics , consumption (sociology) , yield curve , covariance , asset (computer security) , financial economics , yield (engineering) , liquidity premium , monetary economics , statistics , finance , mathematics , market liquidity , liquidity risk , social science , materials science , computer security , sociology , computer science , metallurgy
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.