Risk Premia and the Dynamic Covariance between Stock and Bond Returns

37 Pages Posted: 5 Jul 2001 Last revised: 23 Oct 2012

See all articles by John T. Scruggs

John T. Scruggs

Allianz Global Investors

Paskalis Glabadanidis

University of Adelaide Business School; Financial Research Network (FIRN)

Date Written: March 21, 2001

Abstract

We investigate two topics: (1) the nature of the dynamic covariance matrix of stock and bond returns, and (2) the intertemporal relation between risk and return. We estimate a conditional two-factor variant of Merton's ICAPM in which long-term government bond returns proxy for the second risk factor. Stock and bond risk premia are linear functions of an asymmetric dynamic covariance (ADC) matrix for stock and bond returns. We find that conditional bond variance responds symmetrically to bond return shocks but is virtually unaffected by stock return shocks, while conditional stock variance responds asymmetrically to both stock and bond return shocks. Models that impose a constant correlation restriction on the covariance matrix between stock and bond returns are strongly rejected. We find that intertemporal risk-return relationships are very sensitive to the specification of conditional first and second moments.

Suggested Citation

Scruggs, John T. and Glabadanidis, Paskalis, Risk Premia and the Dynamic Covariance between Stock and Bond Returns (March 21, 2001). Journal of Financial and Quantitative Analysis (JFQA), Vol. 38, No. 2, 2003. Available at SSRN: https://ssrn.com/abstract=275911 or http://dx.doi.org/10.2139/ssrn.275911

John T. Scruggs (Contact Author)

Allianz Global Investors ( email )

555 Mission Street
Suite 1700
San Francisco, CA 94105
United States

Paskalis Glabadanidis

University of Adelaide Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
844
Abstract Views
3,294
rank
27,418
PlumX Metrics