The Cross-Section and Time-Series of Stock and Bond Returns
Ralph S. J. Koijen
New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR)
Hanno N. Lustig
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
Stijn Van Nieuwerburgh
New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
December 15, 2014
NYU Working Paper No. 2451/31423
Low realizations of the bond factors, typically at the onset of recessions, coincide with low value-minus-growth returns, low future dividend growth on value-minus-growth, and low future economic growth. This evidence supports the view that the business cycle is a priced state variable in stock markets. Because of this new nexus between stock and bond markets, a parsimonious three-factor model can be used to jointly price the book-to-market stock and maturity-sorted bond portfolios and reproduce the time-series variation in expected bond returns. Structural dynamic asset pricing models need to include a central role for the business cycle as a priced state variable to be quantitatively consistent with the observed value, equity, and bond risk premia.
Number of Pages in PDF File: 64
Date posted: January 13, 2012 ; Last revised: December 16, 2014
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