The Determinants of Stock and Bond Return Comovements

59 Pages Posted: 18 Aug 2009 Last revised: 13 Sep 2010

See all articles by Lieven Baele

Lieven Baele

Tilburg University - Department of Finance

Geert Bekaert

Columbia Business School - Finance and Economics

Koen Inghelbrecht

Ghent University - Department of Economics

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Date Written: August 2009

Abstract

We study the economic sources of stock-bond return comovements and its time variation using a dynamic factor model. We identify the economic factors employing a semi-structural regime-switching model for state variables such as interest rates, inflation, the output gap, and cash flow growth. We also view risk aversion, uncertainty about inflation and output, and liquidity proxies as additional potential factors. We find that macro-economic fundamentals contribute little to explaining stock and bond return correlations, but that other factors, especially liquidity proxies, play a more important role. The macro factors are still important in fitting bond return volatility; whereas the "variance premium" is critical in explaining stock return volatility. However, the factor model primarily fails in fitting covariances.

Suggested Citation

Baele, Lieven and Bekaert, Geert and Inghelbrecht, Koen, The Determinants of Stock and Bond Return Comovements (August 2009). NBER Working Paper No. w15260. Available at SSRN: https://ssrn.com/abstract=1454992

Lieven Baele

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 3257 (Phone)
+31 13 466 2875 (Fax)

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Koen Inghelbrecht

Ghent University - Department of Economics ( email )

Sint-Pietersplein 5
Ghent, B-9000
Belgium
+32 9 264 89 77 (Phone)

HOME PAGE: http://users.ugent.be/~kjinghel/

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