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Conditional Co-Skewness in Stock and Bond Markets: Time Series Evidence

Management Science, Forthcoming

39 Pages Posted: 21 May 2008 Last revised: 13 Apr 2011

Jian Yang

University of Colorado at Denver - Business School

Yinggang Zhou

Xiamen University - Department of Finance

Zijun Wang

Texas A&M University

Date Written: July 19, 2010

Abstract

In the context of a three-moment Intertemporal Capital Asset Pricing Model specification, we characterize conditional co-skewness between stock and bond excess returns using a bivariate regime-switching model. We find that both conditional U.S. stock co-skewness (the relation between stock return and bond volatility) and bond co-skewness (the relation between bond return and stock volatility) command statistically and economically significant negative ex ante risk premiums. The impacts of the US stock and bond co-skewness on the conditional stock and bond premium on average is as large as the average of corresponding unconditional premium on these markets. The basic findings are quite robust in another country (U.K.) and in the recent post-WWII period.

Keywords: regime-switching, conditional co-skewness, intertemporal asset pricing, stock and bond co-movements

JEL Classification: G11, G12, G15

Suggested Citation

Yang, Jian and Zhou, Yinggang and Wang, Zijun, Conditional Co-Skewness in Stock and Bond Markets: Time Series Evidence (July 19, 2010). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1134960

Jian Yang (Contact Author)

University of Colorado at Denver - Business School ( email )

1250 14th St.
Denver, CO 80204
United States

Yinggang Zhou

Xiamen University - Department of Finance ( email )

Xiamen, Fujian 361005
China

Zijun Wang

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

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