The Co-Movement Puzzle

Abstract

This paper studies the co-movement between discount rates on housing, equity, and corporate bonds. Most theories in macro-finance imply strongly positive co-movement, attributable to time variation in a cross-asset discount factor. I show that in the data, this co-movement is absent. Across 17 advanced economies and 150 years, asset-specific discount rates are uncorrelated, and asset valuations predict returns on individual asset classes, but not across asset classes. Such asset-specific discount rate movements are unlikely to be driven by cross-asset factors related to risk aversion and macroeconomic risk, but I provide evidence linking them to capital flows and subjective investor expectations.

Keywords: discount rates, risk premia, return predictability, excess volatility, discount rate co-movement

JEL Classification: G12, G15, G17, E44, N20