The cross-section and time series of stock and bond returns
Ralph S.J. Koijen,
Hanno Lustig and
Stijn Van Nieuwerburgh
Journal of Monetary Economics, 2017, vol. 88, issue C, 50-69
Bond factors which predict future U.S. economic activity at business cycle horizons are priced in the cross-section of U.S. stock returns. High book-to-market stocks have larger exposures to these bond factors than low book-to-market stocks, because their cash flows are more sensitive to the business cycle. Because of this new nexus between stock and bond markets, a parsimonious three-factor dynamic no-arbitrage model can be used to jointly price book-to-market-sorted portfolios of stocks and maturity-sorted bond portfolios, while reproducing the time-series variation in expected bond returns. The business cycle itself is a priced state variable in stock and bond markets.
Keywords: Value premium; Bond risk premium; Business cycles and asset pricing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
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Working Paper: The Cross-Section and Time Series of Stock and Bond Returns (2017)
Working Paper: The Cross-Section and Time-Series of Stock and Bond Returns (2012)
Working Paper: The Cross-Section and Time-Series of Stock and Bond Returns (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:88:y:2017:i:c:p:50-69
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