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http://ssrn.com/abstract=1654239
 
 

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Comovement and Predictability Relationships between Bonds and the Cross-Section of Stocks


Malcolm P. Baker


Harvard Business School; National Bureau of Economic Research (NBER)

Jeffrey Wurgler


NYU Stern School of Business; National Bureau of Economic Research (NBER)

April 2010

NYU Working Paper No. 2451/29604

Abstract:     
In contrast to the well-known unstable relationship between the returns on government bonds and stock indices, we find that bonds are robustly related to the cross-section of stock returns in both comovement and predictability patterns. Government bonds comove more strongly with bond-like stocks: stocks of large, mature, low-volatility, profitable, dividend-paying firms that are neither high growth nor distressed. Time-series variables already known to predict returns on bonds also predict returns on bond-like stocks, and vice-versa. These relationships remain in place even when bonds and stocks become “decoupled” at the index level. They are likely driven by a combination of effects including correlations between real cash flows on bonds and bond-like stocks, correlations between their risk-based return premia, and periodic flights to quality.

Number of Pages in PDF File: 45

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Date posted: August 10, 2010  

Suggested Citation

Baker, Malcolm P. and Wurgler, Jeffrey, Comovement and Predictability Relationships between Bonds and the Cross-Section of Stocks (April 2010). NYU Working Paper No. 2451/29604. Available at SSRN: http://ssrn.com/abstract=1654239

Contact Information

Malcolm P. Baker
Harvard Business School ( email )
Boston, MA 02163
United States
617-495-6566 (Phone)
HOME PAGE: http://www.people.hbs.edu/mbaker
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jeffrey A. Wurgler (Contact Author)
NYU Stern School of Business ( email )
Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)
HOME PAGE: http://www.stern.nyu.edu/~jwurgler/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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