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.
Highlights
The analysis of the sensitivity of sector returns in the U.S to changes in the market return and the nominal interest rates is a topic of great relevance at the international level, as more and more companies choose external funding to develop its activity (Bartram, 2002; Ferrer et al, 2005; Jammazi, Ferrer, Jaren~o, & Hammoudeh, 2017; Jaren~o, 2008; Jaren~o, Ferrer, & Miroslavova, 2016; Martınez, Ferrer, & Escribano, 2015; among others)
To check the robustness of the results, the whole sample is broken into two sub-periods, in order to analyse whether the sensitivity of the sector returns is different depending on the phase of the economic cycle, that is, pre-subprime crisis sub-period (1990–2007) and subprime crisis sub-period (2008–2013)
This research focuses on analysing the sensitivity of U.S sector returns at sector level to unexpected changes in the 10-year nominal interest rate
Summary
The analysis of the sensitivity of sector returns in the U.S to changes in the market return and the nominal interest rates is a topic of great relevance at the international level, as more and more companies choose external funding to develop its activity (Bartram, 2002; Ferrer et al, 2005; Jammazi, Ferrer, Jaren~o, & Hammoudeh, 2017; Jaren~o, 2008; Jaren~o, Ferrer, & Miroslavova, 2016; Martınez, Ferrer, & Escribano, 2015; among others). The ideal business model is one that combines equitable distribution percentages of both internal and external financing In this sense, the significance of the topic is increasing and has great relevance for the consulting sector of the company, since an increase in interest rates implies a higher cost of external financing. The great cycle of interest rate reduction that has been developing since the beginning of the 1980s has translated into the fact that, in addition to the annual interest paid by the bonds, the investor has obtained an additional return from the revaluation of the same In this period, fixed income has acted as a factor of portfolio stability during periods of stock market crashes, and has outperformed most alternative assets including equities. The process of capital transfer generated between the fixed income and equity markets in response to interest rate variations is a result of the strong competition between both markets in terms of attracting investments (Ferrer et al, 2005)
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