A Study on Yield Spreads and Stock Prices
Date Issued
2007
Date
2007
Author(s)
Chen, Chih-Wen
DOI
en-US
Abstract
In this thesis we explore a theoretical framework to analyze the associations between stock prices, short-term interest rates, and long-term interest rates. In particular, this study considers a discrete time model in which investors have positions of stocks and determine the optimal portfolios of stocks, short-term bonds, and long-term bonds. Several properties of yield spreads are also discussed. The main results are summarized as follows. First, interest rate level correlates closely with the expected rate of return on stock market and the volatility of stock prices, but the extent of relative risk aversion almost does not matter. This paper further indicates that interest rate level increases as either the expected rate of return on stock or the volatility of stock prices increases. Second, the more stock prices fluctuate, the larger volatilities of interest rates become. It also finds that the volatilities of interest rates get toward the maximum as the probability of an upward movement of stock prices tends to the one of a downward movement of stock prices. Third, yield spreads also increase as either the expected rate of return on stock or the volatility of stock prices increases. Similarly, the relative risk aversion does not affect the yield spread significantly, too. Under our framework, it is verified again that the expected rate of return on any bond in excess of the spot rate is proportional to its volatility.
Subjects
最適投資組合
收益差
相對風險規避
波動率
離散時間模型
Optimal Portfolios
Yield Spreads
Relative Risk Aversion
Volatility
Discrete Time Model
Type
thesis