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Dynamics of bond and stock returns

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  • Kozak, Serhiy
Abstract
A production-based equilibrium model jointly prices bond and stock returns and produces time-varying correlation between stock and real treasury returns that changes in both magnitude and sign. The term premium is time-varying and changes sign. The model incorporates time-varying risk aversion and two physical technologies with different cash-flow risks. Bonds hedge risk-aversion shocks and command negative term premium through this channel. Cash-flow shocks produce co-movement of bond and stock returns and positive term premium. Relative strength of these two mechanisms varies over time. The correlation is a powerful predictor of relative bond-stock and long-short equity returns in the data.

Suggested Citation

  • Kozak, Serhiy, 2022. "Dynamics of bond and stock returns," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 188-209.
    • Handle: RePEc:eee:moneco:v:126:y:2022:i:c:p:188-209
    DOI: 10.1016/j.jmoneco.2021.12.004
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    Cited by:

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    3. Gregory R Duffee, 2023. "Macroeconomic News and Stock–Bond Comovement," Review of Finance, European Finance Association, vol. 27(5), pages 1859-1882.
    4. Sungjun Cho & Liu Liu, 2023. "Correcting estimation bias in regime switching dynamic term structure models," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 1093-1127, October.

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    More about this item

    Keywords

    Bond-stock correlation; Risk premia; General equilibrium;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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