US term structure and international stock market volatility: The role of the expectations factor and the maturity premium

Matthew C. Li

doi:10.1016/j.intfin.2015.12.001

US term structure and international stock market volatility: The role of the expectations factor and the maturity premium

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Abstract

This paper empirically investigates the information content of the US term structure of interest rates (USTS) on three major stock markets. We separate the term structure into two components: expected future short rates–the expectations factor (EF)–and the time-varying maturity premium (MP) and find answers to three questions. 1) Does the slope of the USTS contain information about stock market volatility? 2) If yes, which stock market is the USTS most informative about? And 3) Do EF and MP equally explain stock market volatility? Estimation results indicate that the USTS does help to explain stock market volatility and it is the most informative about both the US and UK markets, followed by Japan. Finally, EF is found to be more informative than MP.

Original language	English
Pages (from-to)	1-15
Number of pages	15
Journal	Journal of International Financial Markets, Institutions and Money
Volume	41
Early online date	29 Dec 2015
DOIs	https://doi.org/10.1016/j.intfin.2015.12.001
Publication status	Published - Mar 2016

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10.1016/j.intfin.2015.12.001

http://www.sciencedirect.com/science/article/pii/S1042443115001146

Cite this

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title = "US term structure and international stock market volatility: The role of the expectations factor and the maturity premium",

abstract = "This paper empirically investigates the information content of the US term structure of interest rates (USTS) on three major stock markets. We separate the term structure into two components: expected future short rates–the expectations factor (EF)–and the time-varying maturity premium (MP) and find answers to three questions. 1) Does the slope of the USTS contain information about stock market volatility? 2) If yes, which stock market is the USTS most informative about? And 3) Do EF and MP equally explain stock market volatility? Estimation results indicate that the USTS does help to explain stock market volatility and it is the most informative about both the US and UK markets, followed by Japan. Finally, EF is found to be more informative than MP.",

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