 Market fragility and the paradox of the recent stock-bond dissonanceChristos Koulovatianos, Jian Li () and Fabienne Weber Economics Letters, 2018, vol. 162, issue C, 162-166 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) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:162:y:2018:i:c:p:162-166 DOI: 10.1016/j.econlet.2017.11.022 Access Statistics for this article Economics Letters is currently edited by Economics Letters Editorial Office More articles in Economics Letters from Elsevier |
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