Comovement and Predictability Relationships between Bonds and Thecross-Section of Stocks
Malcolm P. Baker
Harvard Business School; National Bureau of Economic Research (NBER)
NYU Stern School of Business; National Bureau of Economic Research (NBER)
February 22, 2010
NYU Working Paper No. FIN-10-003
In contrast to the well-known unstable relationship between the returnson 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: 45working papers series
Date posted: October 6, 2010
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 1.375 seconds