Macroeconomic Drivers of Bond and Equity Risks

John Campbell, Carolin Pflueger and Luis Viceira ()

No 20070, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Our new model of consumption-based habit formation preferences generates loglinear, homoskedastic 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.

JEL-codes: E43 E44 E52 G12 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-mac and nep-mon
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Published as John Y. Campbell & Carolin Pflueger & Luis M. Viceira, 2020. "Macroeconomic Drivers of Bond and Equity Risks," Journal of Political Economy, vol 128(8), pages 3148-3185.

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Working Paper: Macroeconomic Drivers of Bond and Equity Risks (2018)
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