What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns

53 Pages Posted: 5 Jul 2004 Last revised: 15 Sep 2008

See all articles by John Y. Campbell

John Y. Campbell

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

John Ammer

U.S. Federal Reserve Board of Governors

Date Written: June 1991

Abstract

This paper uses a log-linear asset pricing framework and a vector autoregressive model to break down movements in stock and bond returns into changes in expectations of future stock dividends, inflation, short-term real interest rates, and excess returns on stocks and bonds. In monthly postwar U.S. data, excess stock returns are found to be driven largely by news about future excess stock returns, while excess 10-year bond returns are driven largely by news about future inflation. Real interest rate changes have little impact on either stock or 10-year bond returns, although they do affect the short-term nominal interest rate and the slope of the term structure. These findings help to explain why postwar excess stock and bond returns have been almost uncorrelated.

Suggested Citation

Campbell, John Y. and Ammer, John Matthew, What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns (June 1991). NBER Working Paper No. w3760. Available at SSRN: https://ssrn.com/abstract=309595

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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John Matthew Ammer

U.S. Federal Reserve Board of Governors ( email )

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