The US Stock Market Leads the Federal Funds Rate and Treasury Bond Yields
Author Information
Author(s): Guo Kun, Zhou Wei-Xing, Cheng Si-Wei, Sornette Didier
Primary Institution: Chinese Academy of Sciences
Hypothesis
Does the stock market lead the Federal Funds Rate and Treasury bond yields?
Conclusion
The study finds that the stock market leads the yields, including the Federal Funds Rate, contradicting common beliefs about their relationship.
Supporting Evidence
- The stock market and yields move in the same direction.
- The stock market leads the yields, including especially the Federal Funds Rate.
- Short-term yields lead long-term yields before the financial crisis, and the inverse holds afterwards.
Takeaway
This study shows that when the stock market goes up, the interest rates and bond yields tend to follow, which is the opposite of what many people think.
Methodology
The study uses the thermal optimal path method to analyze the lead-lag relationships between the S&P 500 index and various Treasury bond yields.
Limitations
The analysis is limited to data from August 2000 to February 2010 and may not account for all economic variables.
Statistical Information
P-Value
p<0.05
Statistical Significance
p<0.05
Digital Object Identifier (DOI)
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