TY - JOUR
T1 - Treasury rates no longer predict returns
T2 - a reappraisal of Breen, Glosten and Jagannathan (1989)
AU - Gray, Philip
AU - Huynh, Thanh
N1 - Publisher Copyright:
© 2021 Now Publishers Inc. All rights reserved.
Copyright:
Copyright 2021 Elsevier B.V., All rights reserved.
PY - 2021/8/2
Y1 - 2021/8/2
N2 - Breen et al. (1989) show that the negative relation between excess stock returns and Treasury bill rates is economically important. From 1954 to 1986, the predictive ability of interest rates facilitated a trading strategy that generated average returns at least on par with a buyand- hold market investment but with significantly lower risk. The services of a portfolio manager using this predictive model to invest justified a management fee of nearly 2% per annum. Using currentlyavailable data, we can nearly perfectly replicate Breen et al.'s (1989) key findings in sample. However, the success of Treasury bill rates as a predictor of equity returns appears to be specific to the time period studied. When the same methodology is applied out of sample from 1987 to 2018, there is little statistical or economic evidence of predictability. Additional out-of-sample analysis of G20 countries shows only sporadic support for the notion that interest rates predict equity returns.
AB - Breen et al. (1989) show that the negative relation between excess stock returns and Treasury bill rates is economically important. From 1954 to 1986, the predictive ability of interest rates facilitated a trading strategy that generated average returns at least on par with a buyand- hold market investment but with significantly lower risk. The services of a portfolio manager using this predictive model to invest justified a management fee of nearly 2% per annum. Using currentlyavailable data, we can nearly perfectly replicate Breen et al.'s (1989) key findings in sample. However, the success of Treasury bill rates as a predictor of equity returns appears to be specific to the time period studied. When the same methodology is applied out of sample from 1987 to 2018, there is little statistical or economic evidence of predictability. Additional out-of-sample analysis of G20 countries shows only sporadic support for the notion that interest rates predict equity returns.
KW - Out-ofsample forecasts
KW - Return predictability
KW - Trading strategy
KW - Treasury bill rates
UR - http://www.scopus.com/inward/record.url?scp=85112058954&partnerID=8YFLogxK
U2 - 10.1561/104.00000096
DO - 10.1561/104.00000096
M3 - Article
AN - SCOPUS:85112058954
SN - 2164-5744
VL - 10
SP - 429
EP - 444
JO - Critical Finance Review
JF - Critical Finance Review
IS - 3
ER -