Author(s) :

Samarth Tewari.

Volume/Issue :

Abstract :

The current paper examines whether inversions in the yield curve of U.S. Treasuries continue to possess the forecasting ability for equity market volatility in the post-Global Financial Crisis (GFC) environment (2009-2024). With the use of 4,299 daily data points of the spread between 10-Year and 2-Year Treasury rates (T10Y2Y) and the CBOE Volatility Index (VIX) obtained from the FRED database, this paper uses Pearson correlation coefficient, Granger causality tests on daily (lags 1-5) and monthly (lags 1-6) frequencies, ordinary least squares (OLS) regressions with macroeconomic controls, Vector Autoregression (VAR), and Chow structural break test. Granger causality is not confirmed at all tested horizons. OLS regressions explain less than 1% of the future VIX variance even after accounting for S&P 500 returns. The Chow test confirms the presence of a statistically significant structural break at the COVID-19 threshold (F = 214.32, p < 0.001). This means that there was a regime shift in the relationship between the yield curve and the level of volatility. Results prove to be robust when excluding the period of the coronavirus pandemic and winsorizing VIX at the 99th percentile.