Yield Curve and Momentum Effects in Monthly U.S. Equity Returns: Some Nonparametric Evidence

Abstract

In this paper, two largely familiar stock market anomalies – the yield curve and the momentum effects - are re-examined for the S&P 500 index by using nonparametric regression. The results essentially confirm the existence of both of these phenomena, but also indicate that the stochastic linkages between the explanatory variables and future index returns are nonlinear and mutually dependent. It hence turns out that the greater flexibility offered by nonparametric regression enables the detection and characterisation of some features of the underlying relationship that would have been gone unnoticed under the linearity and additivity assumptions underlying simpler regression approaches.