Time-varying risk of nominal bonds: How important are macroeconomic shocks?

Andrey Ermolov

Journal of Financial Economics, 2022, vol. 145, issue 1, 1-28

Abstract: I study the sufficiency of macroeconomic information to explain the time-variation in second moments of stock and bond returns, with a particular attention to stock-bond correlations. I propose an external habit model supplemented with realistic non-Gaussian fundamentals estimated solely from macroeconomic data. Intertemporal smoothing and precautionary savings effects – driven by consumption shocks – combine with a time-varying covariance between consumption and inflation to generate large positive and negative stock-bond return correlations. Macroeconomic shocks are most important in explaining second moments of stock and bond returns from the late 1970’s to mid-1990’s and during the Great Recession.

Keywords: Stock-bond return correlations; Macroeconomic volatility; Habit formation; Equity; Fixed income; Sovereign bonds (search for similar items in EconPapers)
JEL-codes: E43 E44 G11 G12 G17 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:1:p:1-28

DOI: 10.1016/j.jfineco.2022.04.003

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