The Term-Spread and its Effects in Capital Markets.

Abstract

This documents studies the behavior of term-spread,i.e, the difference between yields on the long and short-term treasury securities, focusing specifically on its effects in cap-ital markets and the American stock exchange, and evaluate the transmission of expec-tations throughout Latin America. The shape of the yield curve is fundamental in the creation of expectations for eco-nomic growth and effectiveness of monetary policy as its inversion can create expec-tations of economic crisis. We developed and calibrate Vector Autoregressive Models in is canonical form and also using long term restrictions to evaluate the creation of expectations for economic growth and effectiveness of monetary policy. Furthermore, we assess among competing theories regarding the relationships between interests rates and expectations and evaluate the consequences of term-spread shocks in capital mar-kets analyzed. Theoretically we demonstrate for Latin America that interest rates transmission of expectations behave accordingly to the preferred habitat theory of Modigliani and Sutch (1966) and that long term expectations play a crucial role in investments allocations not only in the shape of zero coupon curves for Latin-American countries but also in the behavior of sectors Standard & Poors indexes components via ETFs. We finally comple-ment the analysis by counteracting the long-term restrictions including oil market and estimate the shared effect on the stock exchange indexes.