The Stock-Bond Return Relation, the Term-Structure's Slope, and Asset-Class Risk Dynamics

Posted: 18 Sep 2009 Last revised: 11 Dec 2014

See all articles by Naresh Bansal

Naresh Bansal

Saint Louis University - Department of Finance

Robert A. Connolly

University of North Carolina (UNC) at Chapel Hill - Finance Area

Chris T. Stivers

University of Louisville

Date Written: September 17, 2012

Abstract

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

Bansal, Naresh and Connolly, Robert A. and Stivers, Chris T., The Stock-Bond Return Relation, the Term-Structure's Slope, and Asset-Class Risk Dynamics (September 17, 2012). Journal of Financial and Quantitative Analysis, Vo. 49, pp. 699-724, June 2014.. Available at SSRN: https://ssrn.com/abstract=1474871 or http://dx.doi.org/10.2139/ssrn.1474871

Naresh Bansal

Saint Louis University - Department of Finance ( email )

John Cook School of Business
St. Louis, MO 63108
United States
314-977-7204 (Phone)

Robert A. Connolly

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Campus Box 3490
Chapel Hill, NC 27599-3490
United States
919-962-0053 (Phone)
919-962-5539 (Fax)

HOME PAGE: http://itr.bschool.unc.edu/faculty/connolly

Chris T. Stivers (Contact Author)

University of Louisville ( email )

Finance Dept., College of Business
University of Louisville
Louisville, KY 40292
United States
502-852-4829 (Phone)

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