Yield Curve Shifts and the Cross-Section of Global Equity Returns

Interest rate changes typically affect the value of equities. However, the slow movement of investment capital may delay the transmission of this information from interest rate markets to stocks. Using a century of data from sixty countries, we demonstrate that yield curve shifts predict future stock returns. The quintile of stock markets with the highest change in government bond yields underperforms the countries with the lowest change by 0.76% per month. The phenomenon is robust to many considerations. It is not subsumed by known predictors of market returns, nor can it be explained by various macroeconomic variables. Finally, the low correlation with established global factors allows investors to effectively inte-grate the yield curve shift strategy in an international investment portfolio