Macroeconomic Drivers of Bond and Equity Risks

56 Pages Posted: 28 Apr 2014

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 Chicago - Harris School of Public Policy; National Bureau of Economic Research (NBER)

Luis M. Viceira

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

Date Written: April 2014

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.

Suggested Citation

Campbell, John Y. and Pflueger, Carolin E. and Viceira, Luis M., Macroeconomic Drivers of Bond and Equity Risks (April 2014). NBER Working Paper No. w20070. Available at SSRN: https://ssrn.com/abstract=2430065

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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

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Carolin E. Pflueger

University of Chicago - Harris School of Public Policy ( email )

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Chicago, IL 60637
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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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Cambridge, MA 02138
United States

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