Time-varying threshold dynamics of US bond yield spreads and Dow index returns
by Nicholas R. Lee; Yih-Bey Lin; Ming-Jun Chen
International Journal of Monetary Economics and Finance (IJMEF), Vol. 16, No. 6, 2023

Abstract: Changes in the slope of the yield curve accompanied by rich instability in the stock market could lead to structural changes. This paper examines threshold relations between yield curve and stock market price movement applying the threshold vector error correction model (TVECM) with two regimes, usual and unusual regimes. We consider weekly spreads between the 10- and 2-year Treasury bonds yield curve (YC) and Dow index price (DJ) transformed by the log function. Besides, we further discuss the possibility of time-varying threshold relations across different subperiods. Our findings show that there is threshold relation from DJ to YC in the usual regime but bidirectional relations in the unusual regime, with stronger relation from DJ to YC. Furthermore, time-varying threshold dynamics of two variables can be detected at different times. Thus, our contribution is that yield curve slope change can drive big moves in stock prices.

Online publication date: Tue, 16-Jan-2024

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