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
Date Written: July 19, 2010
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: Suggested Citation