Inverted Yield Curve and Performance of Stocks of Different Market Capitalizations

This paper investigates in the context of the Indian markets the linkage between the effects of an inverted yield curve and the performance of stocks of different market capitalizations i.e. the small, big and mid-cap stocks for the period 2007–09. An attempt was made to find out if there is any particular stock group that performed significantly well during the period of inverted yield curve and more specifically if there is a ‘Big Firm Effect’ associated with the Yield Curve Inversion wherein the Big-cap stocks outperform the mid and the small stocks in the post inversion period. The study indicates that in the case of Indian markets there is no Big firm Effect associated with the inverted yield-curve phenomenon which is unlike the results of the studies based on the US market. Thus the investors in the Indian market should be careful while taking any investment decision based on the inverted yield curve phenomenon as its role and implications are quite different here in India as opposed to the developed markets like the USA.