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Stock and bond returns with Moody Investors

Geert Bekaert (), Eric Engstrom () and Steven R. Grenadier

Journal of Empirical Finance, 2010, vol. 17, issue 5, 867-894

Abstract: We present a tractable, linear model for the simultaneous pricing of stock and bond returns that incorporates stochastic risk aversion. In this model, analytic solutions for endogenous stock and bond prices and returns are readily calculated. After estimating the parameters of the model by the general method of moments, we investigate a series of classic puzzles of the empirical asset pricing literature. In particular, our model is shown to jointly accommodate the mean and volatility of equity and long term bond risk premia as well as salient features of the nominal short rate, the dividend yield, and the term spread. Also, the model matches the evidence for predictability of excess stock and bond returns. However, the stock-bond return correlation implied by the model is somewhat higher than that in the data.

Keywords: Equity; premium; Excess; volatility; Stock-bond; return; correlation; Return; predictability; Countercyclical; risk; aversion; Habit; persistence (search for similar items in EconPapers)
Date: 2010
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Related works:
Working Paper: Stock and Bond Returns with Moody Investors (2006) Downloads
Working Paper: Stock and Bond Returns with Moody Investors (2006) Downloads
Working Paper: Stock and Bond Returns with Moody Investors (2004) Downloads
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Persistent link: http://EconPapers.repec.org/RePEc:eee:empfin:v:17:y:2010:i:5:p:867-894

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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