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Macroeconomic Drivers of Bond and Equity Risks

John Campbell (), Carolin Pflueger and Luis Viceira ()

No 14-031, Harvard Business School Working Papers from Harvard Business School

Abstract: Our new model of consumption-based habit formation preferences generates loglinear, homoscedastic macroeconomic dynamics and time-varying risk premia on bonds and stocks. Consumers' first-order condition for the real risk-free interest rate takes the form of an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. Estimating the model separately for 1979-2001 and 2001-2011 explains why the exposure of US Treasury bonds to the stock market changed from positive to negative. A change in the comovement between inflation and the output gap explains changing bond risks, but only when risk premia change endogenously as predicted by the model.

New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2013-09, Revised 2018-08
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Working Paper: Macroeconomic Drivers of Bond and Equity Risks (2014) Downloads
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