Market fragility and the paradox of the recent stock-bond dissonance

Christos Koulovatianos, Jian Li () and Fabienne Weber

No 589, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: After the Lehman-Brothers collapse, the stock index has exceeded its pre-Lehman-Brothers peak by 36% in real terms. Seemingly, markets have been demanding more stocks instead of bonds. Yet, instead of observing higher bond rates, paradoxically, bond rates have been persistently negative after the Lehman-Brothers collapse. To explain this paradox, we suggest that, in the post-Lehman-Brothers period, investors changed their perceptions on disasters, thinking that disasters occur once every 30 years on average, instead of disasters occurring once every 60 years. In our asset-pricing calibration exercise, this rise in perceived market fragility alone can explain the drop in both bond rates and price-dividend ratios observed after the Lehman-Brothers collapse, which indicates that markets mostly demanded bonds instead of stocks.

Keywords: asset pricing; disaster risk; price-dividend ratio; bond returns (search for similar items in EconPapers)
JEL-codes: E43 E44 G01 G12 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-mac
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Journal Article: Market fragility and the paradox of the recent stock-bond dissonance (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:589

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