Survey Forecasts and the Time-Varying Second Moments of Stock and Bond Returns
93 Pages Posted: 15 Mar 2012 Last revised: 26 Jul 2016
Date Written: February 11, 2014
What are the economic determinants of the level and volatility of the second moments of stock and bond returns? We address this central question via the Campbell-Shiller (Campbell and Shiller, 1988) decomposition, with news constructed using survey forecasts. Risk premium news explains most of the unconditional second moments of returns and 86% of the pre- to post-1997 change in the stock-bond covariance. Also, the second moments of risk premium news explain most of the variance of the second moments of returns. In turn, the second moments of fundamental news explain large portions of the variance of the second moments of risk premium news.
Keywords: Campbell-Shiller decomposition, time-varying second moments, stock-bond covariance
JEL Classification: G12
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