The Effects of Inverted Yield Curves on Asset Returns

James Ross McCown

The Financial Review, 1999, vol. 34, issue 2, 109-26

Abstract: Between 1954 and 1991, U.S. stocks, long-term government bonds, and corporate bonds show negative risk premiums during periods preceded by inverted yield curves. Intermediate-term government bonds do not. Going from safer to riskier asset classes, the negative risk premiums increase in absolute value and statistical significance. The consumption CAPM offers a possible explanation for the negative risk premiums. A negative covariance between the growth rate of consumption and the premium on the risky assets will result in a negative risk premium. Empirical tests of the conditional covariance show that the consumption CAPM does not explain the phenomena. Copyright 1999 by MIT Press.

Date: 1999
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