The Cross-Section and Time-Series of Stock and Bond Returns

64 Pages Posted: 13 Jan 2012 Last revised: 16 Dec 2014

See all articles by Ralph S. J. Koijen

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

Multiple version iconThere are 4 versions of this paper

Date Written: December 15, 2014

Abstract

Low realizations of the bond factors, typically at the onset of recessions, coincide with low value-minus-growth returns, low future dividend growth on value-minus-growth, and low future economic growth. This evidence supports the view that the business cycle is a priced state variable in stock markets. Because of this new nexus between stock and bond markets, a parsimonious three-factor model can be used to jointly price the book-to-market stock and maturity-sorted bond portfolios and reproduce the time-series variation in expected bond returns. Structural dynamic asset pricing models need to include a central role for the business cycle as a priced state variable to be quantitatively consistent with the observed value, equity, and bond risk premia.

Suggested Citation

Koijen, Ralph S. J. and Lustig, Hanno N. and Van Nieuwerburgh, Stijn, The Cross-Section and Time-Series of Stock and Bond Returns (December 15, 2014). NYU Working Paper No. 2451/31423, Available at SSRN: https://ssrn.com/abstract=1983081

Ralph S. J. Koijen

University of Chicago - Booth School of Business ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Hanno N. Lustig

Stanford Graduate School of Business ( email )

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Stijn Van Nieuwerburgh (Contact Author)

Columbia University Graduate School of Business ( email )

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