Abstract
The relationships between macroeconomic variables and financial asset returns are of interest to economists because they reveal something about the underlying processes generating the returns on securities, and because investors are interested in whether or not macroeconomic variables can be used to predict future returns on financial assets. This dissertation consists of three essays describing empirical investigations of the yield curve and the inflation rate, and their relationships with returns on US and foreign securities.
The first essay concerns the US yield curve and US securities. US stocks, long-term government bonds, and corporate bonds have negative risk premiums during periods preceded by inverted yield curves. These risk premiums increase as the default risk of the assets decreases. A potential explanation of the negative risk premiums is offered by the consumption CAPM. Assuming risk aversion, negative covariance between the growth rate of consumption and the premium on the risky assets will result in a negative risk premium. Empirical tests show that the consumption CAPM does not explain the negative risk premiums.
The second essay examines the relationships between yield curves and risk premiums of stocks for eight industrialized countries. Negative risk premiums occur for US and German stocks during periods preceded by their inverted yield curves, but not for the other six countries. However, many of the other six have negative risk premiums in periods preceded by inverted German or US yield curves, and all of them have lower risk premiums. This is consistent with the view that a world risk factor, captured by major country yield curves, affects the pricing of assets in these countries.
The third essay concerns the relationships between inflation and returns on stocks for six industrialized countries during the pre-World War II period. The simple correlation between inflation and real returns was found to be negative, which is similar to the post-war findings. Next, the relationship between expected inflation and real returns was examined. The relations were found to be negative for quarterly data, but were statistically indifferent from zero for most of the countries for annual data.