What Ties Return Volatilities to Price Valuations and Fundamentals?

Alexander David and Pietro Veronesi

No 15563, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Stock and Treasury bond comovement, volatilities, and their relations to their price valuations and fundamentals change stochastically over time, both in magnitude and direction. These stochastic changes are explained by a general equilibrium model in which agents learn about composite economic and inflation regimes. We estimate our model using both fundamentals and asset prices, and find that inflation news signal either positive or negative future real economic growth depending on the times, thereby affecting the direction of stock/bond comovement. The learning dynamics generate strong non-linearities between volatilities and price valuations. We find empirical support for numerous predictions of the model.

JEL-codes: G10 G12 G14 G17 (search for similar items in EconPapers)
Date: 2009-12
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published as Journal of Political Economy, Summer 2013, 121, 4, 682 - 746

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