Interest Rate Changes and the Cross-Section of Global Equity Returns

68 Pages Posted: 27 Feb 2021 Last revised: 9 Jan 2023

See all articles by Adam Zaremba

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business; University of Cape Town

Nusret Cakici

Fordham university

Robert J. Bianchi

Griffith University; Griffith University

Huaigang Long

Zhejiang University; Zhejiang University of Finance and Economics (ZUFE)

Date Written: June 4, 2021

Abstract

Interest rate changes typically affect equity values. However, if investors react slowly, the repricing may stretch over time. Using a century of data from sixty countries, we demonstrate that past interest rate changes predict the cross-section of equity returns worldwide. The quintile of stock markets with the highest change in government bond yields under-performs the countries with the lowest change by 0.76% per month. The phenomenon is distinctly robust and cannot be explained by known risk factors. Furthermore, the low correlation with other return patterns paves the way for effective country allocation strategies.

Keywords: government bonds, country equity indexes, interest rates, international stock markets, asset pricing, return predictability, the cross-section of stock returns

JEL Classification: G11, G12, G14, G15, N20

Suggested Citation

Zaremba, Adam and Cakici, Nusret and Bianchi, Robert J. and Bianchi, Robert J. and Long, Huaigang, Interest Rate Changes and the Cross-Section of Global Equity Returns (June 4, 2021). Journal of Economic Dynamics and Control, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3756047 or http://dx.doi.org/10.2139/ssrn.3756047

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

HOME PAGE: http://sites.google.com/view/adamzaremba

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

University of Cape Town

Cape Town
South Africa

Nusret Cakici

Fordham university ( email )

113 West 60th Street
New York, NY 10023
United States
2017473227 (Phone)
07446 (Fax)

Robert J. Bianchi

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

Griffith University ( email )

170 Kessels Road
Nathan, Queensland QLD 4111
Australia

Huaigang Long

Zhejiang University ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058
China

Zhejiang University of Finance and Economics (ZUFE) ( email )

Hangzhou, Zhejiang Province 310018
China

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
416
Abstract Views
1,538
Rank
165,322
PlumX Metrics