Macroeconomic Drivers of Bond and Equity Risks

56 Pages Posted: 25 Aug 2013 Last revised: 30 Aug 2018

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Carolin E. Pflueger

University of British Columbia (UBC) - Division of Finance; National Bureau of Economic Research (NBER)

Luis M. Viceira

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 27, 2018

Abstract

Our new model of consumption-based habit formation preferences generates loglinear, homoskedastic macroeconomic dynamics and time-varying risk premia on bonds and stocks. Consumers' first-order condition for the real risk-free interest rate takes the form of an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. Estimating the model separately for 1979-2001 and 2001-2011 explains why the exposure of US Treasury bonds to the stock market changed from positive to negative. A change in the comovement between inflation and the output gap explains changing bond risks, but only when risk premia change endogenously as predicted by the model.

Keywords: consumption-based habit formation; consumption Euler equation; time-varying risk premia; inflation dynamics; bond-stock correlation

JEL Classification: E3, E4, G12

Suggested Citation

Campbell, John Y. and Pflueger, Carolin E. and Viceira, Luis M., Macroeconomic Drivers of Bond and Equity Risks (August 27, 2018). Available at SSRN: https://ssrn.com/abstract=2315326 or http://dx.doi.org/10.2139/ssrn.2315326

John Y. Campbell

Harvard University - Department of Economics ( email )

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HOME PAGE: http://scholar.harvard.edu/campbell

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Carolin E. Pflueger (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

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Canada

National Bureau of Economic Research (NBER) ( email )

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Luis M. Viceira

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6331 (Phone)
617-496-6592 (Fax)

HOME PAGE: http://www.people.hbs.edu/lviceira

National Bureau of Economic Research (NBER)

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United States

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