The Danish Stock and Bond Markets: Comovement, Return Predictability and Variance Decomposition
42 Pages Posted: 13 Jul 2000
Date Written: May 2000
VAR models of the kind developed by Shiller and Beltratti (1992) and Campbell and Ammer (1993) are used to analyze the Danish stock and bond markets and their comovement. In contrast to these papers, however, VAR parameter estimates are bias-adjusted and VAR generated statistics, including their standard errors and confidence intervals, are computed using bootstrap simulation. In addition, we modify the Campbell-Ammer variance decomposition such that it can handle returns from a long-term coupon bond. Some parts of the results for the Danish stock and bond markets are quite similar to the US results reported by Shiller and Beltratti and Campbell and Ammer, but other parts stand in sharp contrast to the results for the US. The most important differences between the US and Denmark are that in Denmark news about higher future inflation lead to an increase in expected future stock returns, and that excess stock return news and excess bond return news are negatively correlated.
JEL Classification: C15, C32, G12
Suggested Citation: Suggested Citation