Term Spreads and Predictions of Bond and Stock Excess Returns

Authors

  • Dale L. Domian Faculty of Business Administration, Memorial University of Newfoundland, St. John's, NF, Canada, AIB 3X5
  • William Reiehenstein Pat and Thomas R. Powers Chair in Investment Management, Hankamer School of Business, Baylor University, P. O. Box 98004, Waco, TX 76798-8004

DOI:

https://doi.org/10.1016/S1057-0810(99)80011-0

Abstract

Several studies conclude that a long-short term spread, in conjunction with one or more other variables, jointly predict returns on long-term corporate bonds and stocks. We extend these studies by examining the predictive content of intermediate-short term spreads, and by examining regressions of excess returns on 1.5-year to 20-year Trea- sury bonds. We show that the bond market prices an intermediate-short term spread, and not a long-short spread. We believe individuals should vary their debt-equity mix with the level of a default risk premium or the stock market's dividend yield, and vary their debt portfolios' maturity with an intermediate-short term spread.

Downloads

Published

1998-03-30

How to Cite

Domian, D. L., & Reiehenstein, W. (1998). Term Spreads and Predictions of Bond and Stock Excess Returns. Financial Services Review, 7(1), 25–44. https://doi.org/10.1016/S1057-0810(99)80011-0

Issue

Vol. 7 No. 1 (1998): Financial Services Review

Section

New Original Submission

License

Copyright (c) 1998 JAI Press Inc.

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Author(s) retain copyright and grant the Journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows to share the work with an acknowledgment of the work's authorship and initial publication in this Journal.

This license allows the author to remix, tweak, and build upon the original work non-commercially. The new work(s) must be non-commercial and acknowledge the original work.