Common shocks in stocks and bonds

Anna Cieslak and Hao Pang

Journal of Financial Economics, 2021, vol. 142, issue 2, 880-904

Abstract: We propose an approach to identify economic shocks (monetary, growth, and risk premium news) from stock returns and Treasury yield changes, which allows us to study the drivers of asset prices at a daily frequency since the early 1980s. We apply the identification to examine investors’ responses to news from the Fed and key macro announcements. We uncover two risk premium shocks—time-varying compensation for discount rate and cash flow news—which have distinct effects on stocks and bonds. Since the mid-1990s, the Fed-induced reductions in both risk premium sources have generated high average stock returns but an ambiguous response in bonds on FOMC days.

Keywords: Structural shocks; Federal Reserve; announcements; Risk premia; Stock-bond comovement (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 G14 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:2:p:880-904

DOI: 10.1016/j.jfineco.2021.06.008

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