Yield curve inversions: A study of country‐level and firm‐level stock reactions

• Published date: 01 March 2022
• Author: Mitchell D. Quinn,Lei Zhang,Lin Mi
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/irfi.12345

SHORT REPORT

Yield curve inversions: A study of country-level

and firm-level stock reactions

Mitchell D. Quinn

1

| Lei Zhang

2

| Lin Mi

1

1

UQ Business School, University of

Queensland, Brisbane, Queensland, Australia

2

Department of Economics and Finance,

City University of Hong Kong, Kowloon,

Hong Kong

Correspondence

Lin Mi, UQ Business School, University of

Queensland, Brisbane, Queensland, Australia.

Email: l.mi@business.uq.edu.au

Abstract

We examine the short-term stock reactions to yield curve

inversions. Our country-level analysis reveals that including

the United States, only 13 out of 41 countries exhibit signif-

icantly negative stock returns when yield curves invert.

Hence, while inverted yield curves act as a negative signal

in some countries, it is not a ubiquitous rule internationally.

Our firm-level analysis is the first of its kind. We find that

company stocks exhibit strong responses with 3-day cumu-

lative abnormal returns averaging −1.22% globally and

−2.83% for US firms. The results suggest that corporate

bond yield curves contain valuable information of firms'

future performance.

KEYWORDS

corporate bond yield curves, international financial markets,

inverted yield curves, stock returns

JEL CLASSIFICATION

G14; G15

1|INTRODUCTION

On March 22, 2019, the yield curve (10-year minus 3-month US Treasuries) inverted for the first time since the end

of the Global Financial Crisis (GFC). On the same day, the S&P500 dropped 1.93%. On January 31, 2020, the yield

curve inverted again and the S&P500 fell by 1.77%, and this time the US economy entered a recession since the last

recession caused by the GFC. In this study, we formally test the stock reactions to yield curve inversions.

The conventional wisdom is that yield curve inversions may signal impending economic recessions, both in the

United States (e.g., Estrella & Hardouvelis, 1991; Estrella & Mishkin, 1998; Harvey, 1989; Rosenberg & Maurer,

2008; Wang & Yang, 2012) and across a number of major economies (e.g., Bernard & Gerlach, 1998; Capie,

Received: 4 August 2020 Revised: 10 December 2020 Accepted: 21 January 2021

DOI: 10.1111/irfi.12345

© 2021 International Review of Finance Ltd. 2021

278 International Review of Finance. 2022;22:278–285.wileyonlinelibrary.com/journal/irfi