Abstract

http://ssrn.com/abstract=2332106
 
 

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Monetary Policy Drivers of Bond and Equity Risks


John Y. Campbell


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Carolin E. Pflueger


University of British Columbia (UBC) - Division of Finance

Luis M. Viceira


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

April 30, 2015

Harvard Business School Finance Working Paper No. 14-031

Abstract:     
The exposure of US Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average in the period 1960-2011, it was unusually high in the 1980s and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper explores the effects of monetary policy rules, monetary policy uncertainty, and macroeconomic shocks on nominal bond risks, using a New Keynesian model with habit formation and discrete regime shifts in 1977 and 2000. The increase in bond risks after 1977 is attributed primarily to a shift in monetary policy towards a more anti-inflationary stance, while the more recent decrease in bond risks after 2000 is attributed to a renewed focus on output stabilization combined with decreased volatility of supply shocks and increased volatility of the Fed's long-run inflation target. Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks.

Number of Pages in PDF File: 70


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Date posted: September 29, 2013 ; Last revised: May 5, 2015

Suggested Citation

Campbell, John Y. and Pflueger, Carolin E. and Viceira, Luis M., Monetary Policy Drivers of Bond and Equity Risks (April 30, 2015). Harvard Business School Finance Working Paper No. 14-031. Available at SSRN: http://ssrn.com/abstract=2332106 or http://dx.doi.org/10.2139/ssrn.2332106

Contact Information

John Y. Campbell
Harvard University - Department of Economics ( email )
Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)
HOME PAGE: http://scholar.harvard.edu/campbell
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Carolin E. Pflueger
University of British Columbia (UBC) - Division of Finance ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
Luis M. Viceira (Contact Author)
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6331 (Phone)
617-496-6592 (Fax)
HOME PAGE: http://www.people.hbs.edu/lviceira
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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