The Determinants of Stock and Bond Return Comovements

The Review of Financial Studies, Vol. 23, Issue 6, pp. 2374-2428, 2010

National Bank of Belgium Working Paper No. 119

AFA 2009 San Francisco Meetings Paper

EFA 2009 Bergen Meetings Paper

67 Pages Posted: 5 Oct 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

Multiple version iconThere are 2 versions of this paper

Date Written: October 18, 2007

Abstract

We study the economic sources of stock-bond return comovement and its time variation using a dynamic factor model. We identify the economic factors employing structural and non-structural vector autoregressive models for economic state variables such as interest rates, (expected) inflation, output growth and dividend payouts. We also view risk aversion, and uncertainty about inflation and output as additional potential factors. Even the best-fitting economic factor model fits the dynamics of stock-bond return correlations poorly. Alternative factors, such as liquidity proxies, help explain the residual correlations not explained by the economic models.

Keywords: factor models, stock-bond return correlation, macroeconomic factors, new-Keynesian models, structural VAR, liquidity, flight-to-safety

JEL Classification: G11, G12, G14, E43, E44

Suggested Citation

Baele, Lieven and Bekaert, Geert and Inghelbrecht, Koen, The Determinants of Stock and Bond Return Comovements (October 18, 2007). The Review of Financial Studies, Vol. 23, Issue 6, pp. 2374-2428, 2010; National Bank of Belgium Working Paper No. 119; AFA 2009 San Francisco Meetings Paper; EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1687547

Lieven Baele (Contact Author)

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

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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