EconPapers    
Economics at your fingertips  
 

Treasury Rates No Longer Predict Returns: A Reappraisal of Breen, Glosten and Jagannathan (1989)

Philip Gray and Thanh Huynh

Critical Finance Review, 2021, vol. 10, issue 3, 429-444

Abstract: Breen et al. (1989) show that the negative relation between excess stock returns and Treasury bill rates is economically important. From 1954 to 1986, the predictive ability of interest rates facilitated a trading strategy that generated average returns at least on par with a buy-and-hold market investment but with significantly lower risk. The services of a portfolio manager using this predictive model to invest justified a management fee of nearly 2% per annum. Using currently-available data, we can nearly perfectly replicate Breen et al.’s (1989) key findings in sample. However, the success of Treasury bill rates as a predictor of equity returns appears to be specific to the time period studied. When the same methodology is applied out of sample from 1987 to 2018, there is little statistical or economic evidence of predictability. Additional out-of-sample analysis of G20 countries shows only sporadic support for the notion that interest rates predict equity returns.

Keywords: Return predictability; Treasury bill rates; Trading strategy; Out-of-sample forecasts (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://dx.doi.org/10.1561/104.00000096 (application/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000096

Access Statistics for this article

More articles in Critical Finance Review from now publishers
Bibliographic data for series maintained by Alet Heezemans ().

 
Page updated 2022-03-27
Handle: RePEc:now:jnlcfr:104.00000096