Impact of changes in the level, slope and curvature of interest rates on U.S. sector returns: an asymmetric nonlinear cointegration approach

Francisco Jareño, Marta Tolentino, María de la O González and Alejandro Oliver

Economic Research-Ekonomska Istraživanja, 2019, vol. 32, issue 1, 1275-1297

Abstract: This article examines the sensitivity of U.S. sector equity indices to changes in nominal interest rates and in the corresponding principal components (level, slope and curvature of the U.S. yield curve) over the period 1990–2013 using factor models and a nonlinear autoregressive distributed lag (N.A.R.D.L.) approach. Furthermore, for robustness, this research analyses whether the sensitivity of sector stock returns is different depending on the stage of the economy, splitting the whole sample period into two sub-periods: pre-crisis and subprime crisis. In general, the empirical results confirm a substantial exposure to interest rate risk that depends on the model used and the period analysed. In addition, considering the three principal components of the U.S. yield curve, the sensitivity to changes in these components tends to be stronger during the subprime crisis sub-period. Finally, in the N.A.R.D.L. context, about 50% of sectors show long-run relations between sector stock returns and the explanatory factors, mainly during the whole sample and the pre-crisis sub-period. Nevertheless, short-run responses may be mostly shown in the subprime crisis sub-period. Therefore, our results evidence that nominal interest rates and its three components would have asymmetric effects on the U.S. stock returns at sector level, depending on the stage of the economy.

Date: 2019
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DOI: 10.1080/1331677X.2019.1632726

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