The determinants of stock and bond return comovements

Lieven Baele (), Geert Bekaert () and Koen Inghelbrecht

Research series from National Bank of Belgium

Abstract: We study the economic sources of stock-bond return comovement and its time variation using a dynamic factor model. We identify the economic factors employing structural and non-structural vector autoregressive models for economic state variables such as interest rates, (expected) inflation, output growth and dividend payouts. We also view risk aversion, and uncertainty about inflation and output as additional potential factors. Even the best-fitting economic factor model fits the dynamics of stock-bond return correlations poorly. Alternative factors, such as liquidity proxies, help explain the residual correlations not explained by the economic models.

Keywords: factor models; stock-bond return correlation; macroeconomic factors; new-Keynesian models; structural VAR; liquidity; flight-to-safety (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 E43 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2007-10
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Related works:
Working Paper: The Determinants of Stock and Bond Return Comovements (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:nbb:reswpp:200711-27

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