What Ties Return Volatilities to Price Valuations and Fundamentals?
University of Calgary - Haskayne School of Business
University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
May 23, 2013
Journal of Political Economy, Forthcoming
AFA 2011 Denver Meetings Paper
Stock and Treasury bond comovement, volatilities, and their relations to their price valuations and fundamentals change stochastically over time, both in magnitude and direction. These stochastic changes are explained by a general equilibrium model in which agents learn about composite economic and inflation regimes. We estimate our model using both fundamentals and asset prices, and find that inflation news signal either positive or negative future real economic growth depending on the times, thereby affecting the direction of stock/bond comovement. The learning dynamics generate strong non-linearities between volatilities and price valuations. We find empirical support for numerous predictions of the model.
Number of Pages in PDF File: 66
Keywords: Volatility, Uncertainty, Valuation, Forecasting
JEL Classification: G10, G11, G12, G14Accepted Paper Series
Date posted: March 12, 2010 ; Last revised: May 29, 2013
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