The Stock-Bond Return Relation, the Term-Structure's Slope, and Asset-Class Risk Dynamics
Posted: 18 Sep 2009 Last revised: 11 Dec 2014
Date Written: September 17, 2012
We study whether asset-class risk dynamics can help explain the predominantly negative stock-bond return relation and movements in the term-structure's slope over 1997-2011. Using option-derived implied volatilities to measure risk, we find: (1) the negative stock-bond return relation largely disappears when controlling for risk movements, at both monthly and weekly horizons; (2) the partial relation between equity-risk changes and 10-year T-bond excess returns (term-slope movements) is reliably positive (negative); and (3) a stronger link between equity risk and stock returns implies a more negative stock-bond return correlation. Our results suggest a flight-to-quality influence between equity-risk dynamics and longer-term Treasury pricing.
Keywords: Equity Risk, Treasury Bond Prices, Bond Risk Premia, Stochastic Volatility
JEL Classification: G12, G14
Suggested Citation: Suggested Citation