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Predicting country equity returns with interest rates

Equity returns and interest rates are two key figures in global financial markets. This internship is about predicting country equity returns using information from interest rate markets. The goal of the internship is to develop a profitable country allocation strategy for equity markets. Clearly, a thorough understanding of the complex relationship between interest rates and equity returns is a prerequisite for success. We have four important steps in mind for making the internship a success.

The first part of the internship is to provide a comprehensive literature overview. There is a vast literature on predicting equity returns using interest rates. The references at the end of the topic description are a good starting point for the internship. After this part we would like to have complete insight in the main theories and the most important empirical findings from the field.

The second part is creating a reliable dataset. While data for equity returns are relatively easy to obtain, data for interest rates tends to be harder to retrieve. This particularly holds for countries with less developed financial systems. At the end of this part, a database with high quality data for short term and long-term interest rates for different countries is expected to be ready.

The third, and most exiting, part will be devoted to developing ideas, creating strategies, and analyzing performances. Different types of questions need to be answered in this phase, for instance:

  • Are short- or long-term interest rates more informative? Or maybe the long- short spread?
  • Is the level or the change in interest rates a better equity market predictor?
  • Which strategies deliver more stable performance: cross sectional or time series?
  • Are the results driven by certain outliers?

At last, the developed insights and methodologies are expected to be applied on other asset classes, such credits and commodities for instance.

Are you interested?
Let us know your motivation and send it together with your top-3 favorite internship topics, your CV and list of grades to SQ@robeco.nl.
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References

[1] Assefa, T. A., Esqueda, O. A., & Mollick, A. V. (2017). Stock returns and interest rates around the World: A panel data approach. Journal of Economics and Business, 89, 20-35.

[2] Chen, N., Roll, R., & Stephen, A. (1986). Ross, 1986, Economic forces and the stock market. Journal of Business, 59(3), 383-403.

[3] Domian, D. L., Gilster, J. E., & Louton, D. A. (1996). Expected inflation, interest rates, and stock returns. Financial Review, 31(4), 809-830.

[4] Volpert, K. (2013). How Well Do Long-Term Bond Interest Rates Predict Stock Market Returns?. The Journal of Investing, 22(2), 23-28.