Interest Rates and the Relative Performance of Equity Style Indices

Abstract

This article shows that observed patterns in the relative returns of style-defined stock indices are the result of differences in the interest rate sensitivities of growth relative to value stocks and large relative to small stocks. Specifically, the author shows that growth and large-capitalization stocks exhibit greater interest rate sensitivity than value and smallcap stocks, respectively. Persistent style cycles are thus explained by patterns in interest rate movements rather than investor herding or other behavioral systems. This finding suggests that style investing can be used to manage interest rate exposure in much the same fashion as traditional and alternative fixed income strategies.