Dynamics of Bond and Stock Returns

69 Pages Posted: 18 Apr 2015 Last revised: 17 Dec 2021

See all articles by Serhiy Kozak

Serhiy Kozak

University of Maryland - Robert H. Smith School of Business

Date Written: December 15, 2021

Abstract

A production-based equilibrium model jointly prices bond and stock returns and produces time-varying correlation between stock and real treasury returns that changes in both magnitude and sign. The term premium is time-varying and changes sign. The model incorporates time-varying risk aversion and two physical technologies with different cash-flow risks. Bonds hedge risk-aversion shocks and command negative term premium through this channel. Cash-flow shocks produce co-movement of bond and stock returns and positive term premium. Relative strength of these two mechanisms varies over time. The correlation is a powerful predictor of relative bond-stock and long-short equity returns in the data.

Keywords: bond-stock correlation, risk premia, general equilibrium

JEL Classification: G11, G12, E21, E23

Suggested Citation

Kozak, Serhiy, Dynamics of Bond and Stock Returns (December 15, 2021). Available at SSRN: https://ssrn.com/abstract=2595352 or http://dx.doi.org/10.2139/ssrn.2595352

Serhiy Kozak (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

7621 Mowatt Ln
College Park, MD 20742
United States

HOME PAGE: http://serhiykozak.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
648
Abstract Views
2,442
Rank
77,732
PlumX Metrics