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