Dynamics of bond and stock returns

Serhiy Kozak

Journal of Monetary Economics, 2022, vol. 126, issue C, 188-209

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.

Keywords: Bond-stock correlation; Risk premia; General equilibrium (search for similar items in EconPapers)
JEL-codes: E21 E23 G11 G12 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:126:y:2022:i:c:p:188-209

DOI: 10.1016/j.jmoneco.2021.12.004

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